A New Refinancing World: Tight Credit Market and Falling Prices Change Everything

If it's been a while since you bought your home and you're thinking about refinancing, be prepared to face a different landscape than when you applied for your mortgage.

Here are five things to know about the current market and how it could affect you:

1. More Documentation for Refinancing

With the tight credit market, lenders are more stringent. You may have to fork over more documents than before--such as pay stubs, income tax returns, and brokerage statements--to prove you're creditworthy.

2. Reduced Equity? Refinancing Help Available

Average home prices in the second quarter of this year were down 30% from three years ago, according to the Standard & Poor's/Case-Shiller U.S. National Home Price Index. If you're like millions of other Americans, those falling values may have sapped the equity you need to qualify for traditional refinancing. If so, check the federal Making Home Affordable Home Affordable Refinance Plan (HARP), which allows refinancing up to 125% of a home's value. To qualify, your mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac, you must be current on your payments, and have made no late payments (31 days or more late) in the last year. Get an application from any lender approved to do business with Fannie Mae or Freddie Mac. The program expires in January.

3. Longer Refinancing Turnaround

With banking industry layoffs and high demand for refinancing, it's taking longer for banks to turn around refinancing applications. Don't be surprised if the process takes more than 60 days.

4. New Appraisal Rules for Mortgages

New rules in the Home Valuation Code of Conduct, which apply to loans purchased by Fannie Mae and Freddie Mac, are designed to prevent mortgage and real estate salespeople from influencing appraisal values. Now only lenders can work directly with appraisers, and most contract with appraisal management companies, which act as middlemen to hire appraisers. How might this affect you? Complaints are mounting that some of these appraisers don't know the neighborhoods where they're valuing property, resulting in low appraisals and slow turnaround. Stay tuned -- Realtors and others are asking Congress to suspend the new rules.

5. 760 Is the new 740: Higher Credit Scores Needed for Best Mortgage Rates

As always, the higher your credit score, the lower the interest rates and points you'll pay for refinancing. But now you need a higher score than before--at least 760--to get the best rates. But it still might pay to refinance if you have a lower score. Use a refinance calculator to determine whether you'll save money now by refinancing, and compare quotes from lenders using a mortgage loan rate calculator.


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