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Refinancing Barrier

After a nice holiday-blogging-break, I thought that I would talk about something that has been occurring more and more.

Lately, I have been getting inquiries for home loans made by those that have their homes currently listed – or recently delisted – for sale.  Many times, those that inquire are trying to save some money on their monthly payment because they bought a new home and the former home is taking longer than anticipated to sell.  Other times, those that were trying to sell their home have simply given up due to no activity and have decided to just stay put for the foreseeable future. Whatever the reason, those in this boat have probably been told that they cannot refinance their home until a certain number of month pass.

Before I get into the specifics, I must note that this is not a new catch-22 that has popped up because of the mortgage meltdown; it’s a rule that has been around for quite some time but just didn’t come into play very often when the market was booming.

Also, there are exceptions to the rule.  Oftentimes, a borrower that has decided to stay in their home and who is only looking to lower their rate or change their term of their note (i.e. no cash out), can get an exception granted on a case-by-case basis if they are willing to promise to not sell their home in the near future. Also, those looking to take out an FHA mortgage can also refinance.  Both just require one day off the market and a letter of explanation.

Here’s the rule that applies to most Fannie Mae and Freddie Mac loans: We cannot provide financing on any refinance transaction secured by a property that is currently listed for sale or has been listed for sale within the six months prior to the Loan Application (i.e. the date credit was pulled).

Why?  Well, there are two major reasons:

Oftentimes, a borrower is looking to get cash out of their current home to use as a downpayment on a new home that they plan to buy.  This presents a problem for two reasons; first, the borrower will have three mortgages instead of one and, secondly, the loan is often paid off within a few months of closing (because the house is sold) and the lender ends up losing money – they weren’t able to hold the note long enough to turn a profit.

A home that has been listed on the market for a long time, usually six or more months, implies that it will be hard to sell.  When an underwriter reviews a file, they have to look at everything with these questions in mind – What will happen if the borrower defaults and we end up with the home through foreclosure; will this be an asset we will be able to liquidate? When a home has been on the market for a long time, it’s clear that it will be difficult to sell, and, therefore, it is probably not an asset that they would want on their books.

How can a lender tell if my home has been listed for sale?  An appraiser is required to search the MLS and report any listings within the past 12 months.

As with all loans, there are situations that don’t fit the mold.  Please contact me and we can talk about your specific situation.

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