Mortgage standards these days are so tight that former Federal Reserve Chair Ben Bernanke recently got turned down for a refinance mortgage. His case is a good reminder not to take mortgage refinance approval for granted.
There are some things you can do to make sure you don't jeopardize your chances of mortgage application approval, but first, take a moment to enjoy the spectacle of Bernanke's mortgage misadventure. You won't see it on YouTube, because both the mortgage application process and the former Fed Chair are pretty boring, but in home finance circles this qualifies as an epic fail.
Sorry, Mr. Bernanke...
Bernanke, of course, must be one of the world's most recognized financial authorities. According to the New York Times, he reportedly makes $250,000 a speech, and has a book deal that is expected to earn him over a million dollars. Now that he has retired from the Fed, he is interested in refinancing his mortgage, and why shouldn't he? It was Bernanke, after all, who was more instrumental than anyone in orchestrating the record-low mortgage rates of recent years.
This makes it all the more ironic that his mortgage refinance application was turned down.
What happened is that any recent job change can make someone a greater credit risk. This is especially true when someone goes from a steady income to a more up-and-down, commission-based or other performance-dependent compensation system. As great as Bernanke's earning power now is, for the time being it is unproven and uncertain.
Now, wanting to lower his mortgage rate is understandable, but why would someone with that income and Bernanke's assumed wealth even need a mortgage in the first place? It may be for liquidity purposes - until those big speaking fees and book royalties start rolling in, he may not want to tie up a huge chunk of his wealth paying off his mortgage. It may also be for investment purposes. Especially with the tax advantage of mortgage interest, financial professionals often feel they can earn more by investing money than they would have to pay in interest, so why take capital out of the market by paying off a mortgage?
How not to jeopardize your mortgage refinance chances
Whatever Bernanke's reasons - or your reasons - for wanting to refinance a mortgage, here are some tips for making sure you do not blow your chance at getting a loan approved:
- Don't assume mortgage refinance approval is easier. You might think that since you already have a mortgage on your home, getting approved for refinancing is just a formality. That is not so. To the mortgage company, a refinance loan is a new risk, which has to be looked at with a fresh eye. This is especially true with today's tighter approval standards.
- Stick it out at that job a little longer. If you are contemplating a job change at the same time you are thinking of refinancing, try to get the refinancing done first. Otherwise, your job change might complicate your mortgage approval - as Bernanke found out.
- Try to stabilize your compensation. You might do very well on commissions or some other form of incentive-based compensation, but if there is anything you can do to get your employer to structure some of your pay as a base salary or a regular draw against commissions, it will give you something more like the regular income mortgage companies want to see.
- Check your credit report. Bernanke was probably dumbfounded when his application was turned down. People who are in good financial shape are often blindsided by something unexpected on their credit reports. Take a look first so you can deal with any problems before you begin the application process.
- Pay down credit card balances. A lower amount of debt outstanding can raise your credit score, and thus improve your chances of approval.
- Don't open or close any credit card accounts. You may not be surprised to learn that adding credit accounts can hurt your credit score, because it adds to your potential to take on debt. However, while paying down balances is good, actually closing existing credit accounts can be a mistake, because the percentage of your available credit that you are utilizing is also a factor in credit score.
- Check your equity. Standards for loan-to-value ratios, which is the amount of the loan as a percentage of the value of your property, have become much tighter since the housing bubble collapsed. With housing values having moved around so much in recent years, you may not have a good sense of how the amount you are trying to refinance compares with the value of your home. Ideally, your home should be worth at least 20 percent more than the amount you are trying to borrow. If you have some cash available to reduce the amount you need to borrow, it might not only help you get approved, but it could also help you get an even better interest rate.
Take care of these basics, and you can claim success at a financial accomplishment that frustrated the former Federal Reserve Chair - refinancing your mortgage.