If Declined, How Soon Should We Reapply for a Mortgage?

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Q & A with Dottie Herman

Question: My husband just got a large bonus and we just recently got declined for a mortgage. Should we re-apply with the new money in our account or do we have to wait a certain amount of time?

Answer: In order to utilize bonus income, the bonus has to be consistent for 2 consecutive years - if such is not the case, the banks will not be able to utilize the income. The best way to show proof of the bonus is to obtain a copy of the year-end paystub that will show the breakout of the annual income vs the bonus income. If there is increasing bonus income year after year they will use the average (ex. If 2013 bonus income is $5,000 and 2014 bonus income is $10,000, underwriters will use the average of the two years, which is $7,500). If there is declining bonus income they will use the lower of the two (ex. 2013 bonus income $10,000 and 2014 bonus income is $5,000, underwriters will use the lower bonus income of $5,000). If you received 2 years of consistent bonus income you should definitely apply again as the banks will be able to use the additional bonus income. If a client leaves their current company for another company, and there is no documentation of bonus income in the new company, underwriters will not be able to use that bonus income as well.

Question: What is a second mortgage and how do I go about getting one?

Answer: A second mortgage is better known as a Home Equity Line Of Credit (HELOC) which is a credit line on your property. It is the same process as getting a mortgage, except you only pay interest on the amount of the line you actually draw, not what the line is open for. For example, if on a line of credit for $150,000, the client decides to draw on $50,000, client will pay a mortgage payment for only the $50,000 he or she borrowed, and not the $150,000 line of credit - but he or she will have a total line of $150,000 to draw on at anytime while the line of credit is still open. Since the 2008 financial crisis, many banks have shied away from HELOC's, and those that are still in the market have varying degrees of leverage that they will provide. Some banks will give you up to 90% of the value of your home while others would rather be at 70%. As with any financial instrument it is important to speak with a mortgage loan officer to walk through your specific situation and come up with a loan program that fits your individual needs.

Question: What are the current rates? We are thinking of a 30 year fixed mortgage and are going to apply for a pre-approval this week.

Answer: The 30 year fixed is currently 3.750%, and keep in mind that rates change on a daily basis. We recommend that every client contact at least a couple of banks to shop for the lowest rate possible. Please keep in mind that credit score, income, and assets will dictate the specific rate offered to each client.

Question: Why are refinancing rates higher than mortgage rates?

Answer: All things equal, refinance and purchase have the same rates. But in a refinance boom with interest rates at an all-time low, as we have now, two things tend to happen:

1) Refinance volume dramatically increases. Because purchase transactions have hard deadlines - closing dates, etc. - many times refinances can affect the banks' ability to deliver the loans to meet those hard deadlines. Interest rates on a refinance slightly increase to dictate the amount of volume coming in relative to the banks' capacity in order to maintain a high level of service on the purchase transactions.

2) We see lock-jumpers. When a client applies for a refinance it is not always guaranteed that the loan closes:

• there could be appraisal issues where the value does not come in at the target value.

• If rates drop during the process, the client may leave their lender and go with another lender who is offering a lower rate, thus leaving the original lender with lock in fees.

• a customer can generally decide to cancel the transaction at anytime if he/she has a change of heart and does not deem enough benefit after applying for the refinance.

More factors can adversely affect a refinance transaction, costing the bank thousands of dollars in upfront fees. They may charge a higher rate due to the inherent volatility. Hope this helps!