Ask Farnoosh: Will I Qualify for a Refinance?

Timothy @tscrp30 tweets: I’m debating refinancing my home loan. I was laid off for two months but now have temporary employment. Could I still qualify for a refi?
 
Hi Tim,
 
It’s a tempting time to refinance. The average interest rate on a 30-year fixed-rate loan is around 3.5%, according to Bankrate.com. If you plan to stay in your home for the next three years or longer, enough time to break even on any upfront closing costs, it’s probably wise to refinance.
 
But your temporary employment does throw a potential wrench in your plans to refi. In addition to a solid credit history, lenders want to verify that you have steady income and a stable, full-time job before extending you a mortgage, even if you’re just seeking to refinance your existing loan.  “It’s the primary way of securing a loan,” says Gary Schoenholz, a mortgage loan manager at Horizon Financial in South Carolina. “It’s what helps banks determine that you’re likely to pay them back and without it, you’re not likely to get refinanced – even with temporary employment.” Once you have about two years of steady income to show, you’ll greatly improve your chances, he says.

[Click here to check home loan rates in your area.]
 
That said, there are a couple of other options to consider. First, if you have a spouse with a full-time job, you could refinance together. As resident co-borrowers, the bank will consider your spouse’s income and employment status, as well, which could make your application more attractive.
 
Finally, call your current bank. Ask them what options they can provide given your work status. Maybe they can offer you a loan modification, which doesn’t require any income verification. “The downside is it often extends the length of your loan and sends your interest rate about a quarter to a half a percent higher,” says Schoenholz. So, while you’re not able to capitalize on the lowest of low interest rates, a modification could help reduce your monthly mortgage payments and give your budget some additional breathing room as you search for full-time employment.
 
Larry emails: My mother-in-law passed away in 2008. Under the terms of her living trust, her home was left to my wife and our 2 sons. She was living with us when she died and the home was and continues to be rented out. We never notified the lender of her passing and have been paying the mortgage for the last 4 years. Our credit has improved to the point where we would like to refinance the loan (currently 6.25% interest rate). How do we correct the title and will it be a problem getting a new mortgage considering that our 2 sons (ages 10 and 8) own 30% of the property?
 
Hi Larry,
 
For help, I tapped real estate guru and best-selling author Ilyce Glink, as well as Sona Tatiyants, an estate-planning attorney in Glendale, Calif. Without knowing more specifics about your situation, I’ll have to give you some general feedback. Bottom line: your wife can probably find a way to refinance but she'll need to take a few steps first before applying for a new loan.
 
To transfer the title, Tatiyants says, she should first find out who is the trustee. Your wife may be a beneficiary in the will but is she also the trustee, the person assigned to step in and manage the assets? If not, she’ll need to work with the trustee to legally transfer the property to her and the boys. This may involve probate, the process by which a court verifies the will and gives named beneficiaries the right to claim their inheritance.  Following probate, your wife and sons can request to become legal owners of the house and be named on the title. For this, they’ll need to contact either the lender or the loan’s administrator and fill out an application. It would be best to speak with the lender before any transfer takes place just to make sure the bank is comfortable with the manner in which the title to the home is held.  
 
Glink recommends calling a real estate attorney to understand how to best approach the lender, if you aren’t comfortable doing this yourselves. There are some facts you’ll need to be aware of ahead of time. For example, because your sons are minors, it may be challenging to refinance in many states until they reach age 18 or 21. (While minors can inherit assets stated in a will, they're legally not allowed to do anything with the assets until they reach a certain age.) There is, however, at least one way around this rule: “If there are any other assets in the trust that are cash equivalent to the kids’ shares, you may be able to buy them out with cash and have your wife be the remaining owner of the house,” says Tatiyants. “If it’s just one individual, it’s easier to refinance.”
 
In your discussions with the bank, you may come across what’s known as a due on sale clause – or requirement to pay off the loan entirely following a borrower’s death. But note that there are some exceptions whereby a lender cannot enforce the due on sale clause. One is if the loan has been transferred to a relative due to the death of the borrower, which sounds to be your wife’s case.  “Typically, when a family member inherits a property, the lender will either let them assume the loan or just refinance the loan into their own name,” says Glink.
 
She also points out that since the property is rented, if you try to refinance, you might have to do an investor loan, which would be more expensive.
 
On the bright side, your family's been paying the mortgage consistently for several years and your wife’s built up good credit, making her a strong loan applicant.
 
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.