Mortgage applications surge amid record-low rates - Jan. 18, 2012

Mortgage loan applications surged 23% last week, according to the Mortgage Bankers Association, as record-low interest rates convinced many homeowners it was time to refinance into lower-cost loans.

Refinancing activity climbed 26.4% during the week ending January 13, to its highest level since early August, the MBA reported. Meanwhile applications for new mortgages climbed 10.3% week-over-week.

Keep Your Home California Expands to 55 Mortgage Servicers Participating in Mortgage Assistance Program

Freddie cuts some refi credit score requirements

Freddie Mac eliminated the minimum credit score requirement for borrowers seeking a mortgage refinance from their existing servicer, as long as they have at least 20% equity in their home, according to guidance released Thursday.

The change goes into effect for any refinances with a settlement date on or after Jan. 5. Previously, Freddie required at least a 620 credit score before allowing such a high-equity refinance to take place.

In October, the Federal Housing Finance Agency instructed Fannie Mae and Freddie to remove barriers to allow more borrowers to take advantage of historically low interest rates through the Home Affordable Refinance Program.

Rates on most mortgage products began 2012 still below 4%. The government-sponsored enterprises removed upfront fees, limits on loan-to-value ratios and certain representation and warranty risk on the old loan file.

The GSEs took other steps since to fuel even more refis. In December, Fannie eliminated the requirement on lenders to determine the borrower's ability to repay. The reasoning behind the new policy changes was to help more underwater borrowers stay current on their loans. With the latest adjustment Thursday, Freddie is targeting borrowers with high levels of equity as well.

In November, a group of Senators sent a letter to President Obama urging the administration to expand the changes to make it easier on borrowers with high levels of equity to refinance as well.

"Not only is this an issue of fairness, but applying these measures to higher equity borrowers makes good business sense," wrote Sens. Barbara Boxer, D-Calif., and Johnny Isakson, R-Ga., who led the letter.

Fannie and Freddie refinances spiked in September, according to the FHFA. More than 263,700 GSE mortgages refinanced that month, up from 197,000 the month before. It was the highest total since March.

But the overwhelming majority of refinances came on high-equity loans. Of the refinances in September, only 35,000 had LTVs above 80%.

Roughly 4 million Fannie and Freddie loans are underwater.

It's tougher for all borrowers to get a loan for a home purchase or refinancing these days. But many small-business owners are really feeling the pinch.

Take Brett Yarmie, who tried getting a mortgage from about four lenders before finding one that would lend him money to buy a home in the Los Angeles area. That's despite the fact that Mr. Yarmie has owned an automotive body shop for 30 years, and this is the third house he has bought.

"This [mortgage] was definitely the most challenging," he says.

Banks are requiring more financial documentation from all buyers, but because of the variability in their income streams, self-employed borrowers tend to get a more thorough look. Personal tax returns, business tax returns and financial statements are considered in establishing the overall viability of a borrower, says Franco Terango, senior vice president and divisional executive at Bank of America Home Loans.

"Lenders will use a two-year average to derive self-employed income," says Karen Mayfield, national mortgage sales manager at Bank of the West. But if the most recent year's income is the lower of the two, the lender may use that most recent year instead, she adds.

And in a tough economy, many small-business owners aren't posting their best numbers. "You have almost a perfect storm, in the sense that tougher underwriting guidelines resulting from the housing bust are coming around the same time that a lot of business owners have posted their worst years on record," says Greg McBride, senior financial analyst for Bankrate.com.

Another rub: Small-business owners are typically knowledgeable about tax deductions and credits that will reduce the amount of income tax they need to pay, Ms. Mayfield says. But reducing the amount of taxable income on your tax returns means you're showing the lender that you have less income to qualify for a loan as well.

All of the above is shutting self-employed borrowers out of the mortgage market to a greater extent, Mr. McBride says. That can hold true for refinancers and home buyers alike—unless they have loads of equity in their home or can pony up a large down payment.

But making a large down payment may not be a small-business owner's preference, especially if he or she is simultaneously trying to keep a business above water.

There are ways self-employed borrowers can increase their chances of getting a home loan, however. Here are a few tips:

Look for experience. Rather than asking only for rate information, ask whether the lender has a history of working with self-employed borrowers, Ms. Mayfield says.

Those borrowers should "focus more on finding a lender that will understand their situation," she says. "There are many, many institutions and lenders out there. Some individual loan officers aren't going to be able to think out of the box or come up with solutions that someone next door would be able to."

Consider portfolio lenders. Portfolio lenders have more flexibility in originating loans because they don't have to sell the loan to Freddie Mac or Fannie Mae. Instead, such lenders hold the loan on their books, and that makes a big difference in their ability to help self-employed borrowers, Mr. Terango says.

Many portfolio lenders will offer competitive pricing just as they would for standard, conforming mortgages, Ms. Mayfield says. The cost of the loan largely depends on the amount of risk the lender is taking on by approving and holding the mortgage.

Self-employed borrowers also may want to consider credit unions, many of which also keep a good portion of loans on their books, says Steve Rick, senior economist for the Credit Union National Association, a trade association for credit unions.

Boost income. Someone experienced with helping self-employed borrowers may be able to come up with other ways to make the mortgage work.

"We've had people do amended [tax] returns. We will look at a loan application again if they have sent in amended returns to the government," Ms. Mayfield says. Sometimes by rethinking deductions and credits on income taxes, a borrower can increase his qualifying income. Of course, with this strategy, the borrower would also face a new tax bill.

Another possible solution: buying an immediate annuity.

With this insurance product, a person invests a lump sum and, in return, gets a guaranteed revenue stream for life. It's important that the payments begin immediately so they can be counted as a consistent income stream, Ms. Mayfield says.

But keep in mind that an annuity comes with costs of its own, including the fact that you lose control over the money, and when you die your heirs typically don't inherit the annuity. You should consult with an accountant or financial adviser before taking this route.