October 13, 2010 / 3:17 PM / 7 years ago

Personal Finance: Rates are low, so why is refinancing so hard?

WASHINGTON, Oct 13 (Reuters) - Mortgage rates have been bouncing along at record lows, tempting anyone who owns a house to get a better loan.

You may even be salivating over the idea of grabbing a 15-year mortgage at 3.76 percent interest, or locking in 30 years at 4.32 percent -- today’s rates, according to BankRate.com.

Easier said than done.

Those rates are dangling out there like tasty fruit, but they are harder to harvest than you might think. Even employed homeowners with equity to spare are finding the refi market tough to crack because of new, tight lending standards.

The lenders “realize they are giving you a very cheap loan, so they want to make sure they aren’t going to lose more than they have to,” says Farnoosh Torabi, an expert with Credit.com. “I have darned good credit, and my own refinance still took four months,” she added.

So, be prepared to hurry up and wait for that low-cost loan. Here are some steps you can take to push your refi to closing:

-- Clean up your credit. Before you even go rate shopping, get copies of your free credit reports from all three credit reporting bureaus at AnnualCreditReport.com (www.annualcreditreport.com).

Check for mistakes and have them fixed. Then go to MyFico (www.myfico.com) and pay $15.95 for your FICO credit score. It's the one most lenders pay attention to. You will need a score of 740 or better to get the best rates, says Keith Gumbinger of HSH.com (www.hsh.com).

If your credit score isn’t what it should be, you can improve it in a hurry by paying off credit card balances, even if you have to withdraw money from your rainy day fund or borrow some money from your parents (or your kids).

-- Line up all of your ducks. "Get ready to give up your first born," joked Rick Allen, of mortgage comparison site MortgageMarvel.com (mortgagemarvel.com).

“They are going to want all the documentation, sometimes to the point of being ridiculous.” No-doc “handshake” loans don’t really exist anymore.

Self-employed people can get mortgages, if they can demonstrate two years of increasing earnings or a steady income. You will need 1099 forms, tax returns and W-2s to prove you can afford your mortgage. You may also have to provide copies of your property tax bills and assessments, as well as proof that you have adequate insurance on the home.

-- Watch the appraisal carefully. Homeowners in many parts of the country are having problems because the housing market has been so slow that appraisers cannot find enough recent sales of comparable homes to enable them to value yours correctly. If you can find good comparables, give them to your lender or mortgage broker before the appraisal is done.

If the appraisal comes back unreasonably low, challenge it. Your lender may be willing to have the property reappraised. You could buy your own appraisal to bolster your appeal, but that won’t come cheap, and your lender probably won’t take it anyway, Allen says.

-- Consider FHA financing. If you have equity in your home, but not very much, consider taking an FHA loan. They can be written for as much as 96.5 percent of your home’s value. But that will cost you -- FHA loans carry extra mortgage insurance premiums that will show up every month in your mortgage payment. If you are not planning to borrow more than 80 percent of your home’s value, you should be able to get a conventional loan.

-- Bring cash to the table. That may sound crazy, but for underwater borrowers, doing a “cash-in” refinancing can sometimes make sense. It’s like bringing in a second downpayment to raise your home equity to the point where you are no longer underwater. In the second quarter of this year, almost one in four homeowners who refinanced did this, according to Freddie Mac data.

But is it worth it? That depends. If you expect to be moving in just a few years, perhaps not, says Gumbinger. But if you want to stay in your home for a long time and can cut your rate significantly, it may be. Weigh how much you will save on the refinance with how much you could give up in investment income on the extra money you’re putting down. (Editing by Maureen Bavdek)

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