Ben Bernanke, former chairman of the Federal Reserve Board, drew some laughs when he revealed he’d recently tried to refinance the mortgage on his home and had been refused. The amusing aside was taken as proof that the housing market isn’t really enjoying the loose monetary conditions that low interest rates should guarantee.
Why Bernanke was most likely rejected
Bernanke’s rejection could have been caused by something as simple as overlooking the fact that his current employment status is far different than when he ran the Fed. Actually Bernanke’s income is likely far higher now because he commands such extravagant fees for public speaking engagements and lucrative authorship deals.
But if improperly recorded in his application as the earnings of an independent contractor, an automated review process could easily have rejected the application (we’ll comment further on the Bernanke episode in an afterword).
It’s true that half of all mortgage refinance applications are being rejected, and more often than not, due to rigidly tightened regulatory procedures. Because of it, we have some refinance help for you with a series of tips that will guide you through the process and make certain you get your refinance loan approved. Be sure to satisfy the following:
1. Accurate income reporting
Taking care in reporting your income on your mortgage refinance application is critical. In fact, you need to make sure that all of the information on the application is absolutely accurate and matches the documentation you’ve submitted. Even innocent mistakes on an application can stump the programmed calculations of a computer review, or be looked at suspiciously by the loan reviewer once your application makes it to underwriting.
It is always a good idea to confirm with your loan agent that he/she has everything needed to review your application, and to make sure that it is all complete and accurate.
2. Renovate your home before the appraisal
After the loan agent has reviewed your application and documentation, you need to order your appraisal. The appraisal is the document that establishes the value of your property and determines whether or not you have sufficient equity to support the loan. The average cost of appraisal is between $300 – $400 and is usually paid for by the homeowner.
Any necessary renovations of the property or home improvement projects should be completed before the appraisal. The appraiser will want to see each room of your house and will begin to form his opinion of valuation at the time of inspection. It is important that your house be presented in the best light possible.
3. The underwriting requirements
Your completed loan application and appraisal will be forwarded to an underwriter to be reviewed. The underwriter is going to look carefully at each of the documents that you provided to determine your capacity to make the payment on this loan. Be prepared to provide additional documentation or explanation after the underwriter’s review.
If the underwriter is satisfied with your loan application, an approval letter and conditions will be issued. The approval letter will have the terms of the loan that you are approved for and the conditions will list any remaining items that you need to provide.
Read through your approval letter carefully to make sure that the loan terms approved by the underwriter match what you thought you were getting. Also, review your conditions to make sure that you can satisfy all of the underwriter’s requirements.
4. Choose your lock period wisely
Once you are satisfied with your loan approval and conditions, your loan agent will ask you if you are ready to lock your refinance mortgage rate. A rate lock protects you from rising rates. Rate locks are for a specific period of time, generally 7 to 60 days. Although you generally do not have to pay for the rate lock upfront, the term of the rate lock can add to your closing costs. Generally, you should expect that the longer the lock period, the higher the cost at close.
You should carefully evaluate the time it will take you to put together the remaining conditions and factor in time for the lender to review and to prepare your documents. Delays are common in the refinance process, so you’ll want to factor a few extra days for the unexpected.
If you are not able to close within the lock period, you may lose your rate or be subject to lock extension fees, so choose your lock period wisely.
Why does Ben even need to refinance?
Getting back to Ben’s finances. “Rejection” isn’t really the headline on his refinance. “Gaming the tax system” is — particularly cynical gaming by a player who’s been so instrumental in the questionable and generous spending of taxpayers’ money.
Ben Bernanke can afford to pay off his home with less than a year’s worth of his income. Instead, he’s using the tax deduction of a mortgage to leverage investments. It’s called a flaw in the tax code by Harry Stein with the Center for American Progress, a group that typically sides with Democrats.
“He can do better investing the speaking fees in the stock market than using them to pay his mortgage and own his house outright,” Stein said. “I can’t imagine the public policy case for subsidizing leveraged investment for affluent people and there’s just no world in which that makes sense.”
The mortgage interest deduction was designed to encourage home ownership — not to encourage the wealthy to speculate. But most of the benefit of the deduction goes to the already well off. It’s time to cut back use of this tax deduction by the rich (before public disgust eliminates it entirely — for everybody).