In the Spring of 2012 I almost had a heart attack and then a meltdown when my bank told me on day 80 of my mortgage refinance saga they weren’t going to proceed. Trading information back and forth for 80 days was already painful enough. To get told almost three months into the process that I would not get the 2.625% 5/1 ARM due to a missed $8 electricity bill from two years ago was devastating!
Capillaries in my brain began exploding as I wondered why my tenants didn’t pay their final electricity bill, why the utility company didn’t send me the bill, and how an $8 bill could crush my credit score from 790 to 680. The plan was to refinance my primary home mortgage before quitting my job while I still had a W2 paycheck, otherwise, there would be no way I could pass the gauntlet.
As a result of this discovery, I had to basically threaten to pull almost seven figures of assets from the bank if they dared to stop the refinance process so late in the game. A senior manager got on the phone with me and said not to worry. He had a connection with a manager at the utility company where my $8 late payment was due. They apparently ate lunch together once a week,
Not one to do nothing, I took to social media and contacted Pacific Gas & Electric through Twitter to highlight my grievances. They responded instantaneously to my request and issued a “Clear Credit Letter” to my bank to remove the penalty. After another 10 days of waiting, my bank finally gave me the confirmation they could proceed. Talk about torture!
Refinancing a mortgage with a traditional bank is even tougher than I initially thought. Before you proceed, take a guess at what the average credit score is for rejected mortgage loans. 650? 675? 700? I think you’ll be amazed at how tight mortgage standards are still in 2015, five years since the financial crisis ended.
THE AVERAGE FICO CREDIT SCORE FOR DENIED MORTGAGE APPLICANTS
The average credit score for recently denied applications on conventional purchase loans is 729 according to FICO and Money Magazine. Anything above 720 is considered “excellent” by most accounts. I couldn’t believe my eyes so I asked my mortgage officers from Citibank and Bank of America for their feedback. They said lending standards are still tight and it is common for those with under 720 to get denied or seriously delayed.
Getting denied a refinance or a new mortgage loan with a 729 credit score is like:
* Not making the varsity basketball team after averaging 12 points and 10 assists a game.
* Flipping burgers in Detroit after graduating from the University of Michigan magna cum laude.
* Not getting a promotion after consistently finishing in the top 20% for three years in a row.
* Having him marry another woman after you spent your entire precious 20s being his girlfriend! (OK, maybe this is worse)
Now that you know banks are denying folks with good-to-excellent credit every day, you’d be interested to know the average credit score for approved mortgages is a whopping 762! Furthermore, the average approved mortgage applicant comes up with a 21% down payment, has a monthly payment equal to 21% of household income, and rocks a total debt to income (DTI) of no more than 33%.
Forget being able to borrow with only 5%, 10%, or 15% down to get the lowest mortgage rate. Banks are enforcing 20% down or more with conservative debt ratios! No wonder why so many silly Billys raid their 401Ks to buy a home!
Unless you’ve got a stellar credit score, the chance of you buying a home or refinancing your mortgage is low. If you do make it through the process with a lower than excellent credit score, your rate will be higher than optimum. During the process, the underwriter will comb through all your finances multiple times in order to minimize their credit risk.
The feeling I went through from days 80 to 90 of my mortgage refinance is like the feeling of being stuck in traffic one hour before your plane is about to take off multiplied by 10! At least if you miss your plane, you can wait to get another the same day.
SCARY HOW LITTLE WE KNOW UNTIL WE CHECK
For the past two years, I thought I had an excellent credit score in the range of 780-800. Little did I know my credit score was slowly being obliterated thanks to an unknown $8 utility payment. That is pretty concerning because I could have also gone for years without knowing someone was using my identity.
Unless you sign up for a credit monitoring service, there are no gratuitous identity theft warnings. If you are about to take advantage of the current low mortgage rates, you had best check your credit score before you go through the laborious process to save you heartburn, heartache, anger, time, and ultimately money.
Five Steps To Take Before Refinancing Or Applying For A Mortgage
Step 1: Check your free credit score online with AnnualFreeCredit.com, a government sanctioned site. If you are below 720, then you’ve got to then go through your past records to see what is keeping your score down. Call your utility company, credit card companies, and any organization that you’ve borrowed from in the past. Make sure there is nothing outstanding!
Step 2: Once you know your credit score or have cleaned up your record, check the latest mortgage rates online. You’ve got to input pertinent data (mortgage amount, estimated house value, income, etc) to get a realistic rate. It’s like going to the car dealer looking to buy that screaming cheap price you see in the paper only to find out the car doesn’t have any options you want or is sold already.
Step 3: Calculate whether the break even period of when the savings of refinancing starts outweighing the costs is equal to 24 months or less. I like to use a two year mark because anything longer is a crap shoot since the median homeownership duration is only 5.9 years. Sure, you can still come out ahead if your break even period is five years and you don’t sell or refinance until the sixth year, but that’s a suboptimal situation. When you refinance or buy a new home, try to have at least a five year time horizon to stay put. The longer the better because that’s how you build real wealth (think how much your grandparents held and made).
Step 4: Get all your documents in order (W2, paystubs, bank statements, etc). Treat the mortgage application process like a job interview. You need to present yourself in the best light as possible. The bank’s number one goal is to make sure you are a responsible person with a steady income to pay back the loan.
Step 5: Lock in your rate and make sure you ask your banker about all fees involved. Don’t let them surprise you with additional fees beyond what is stated. If there is an application fee, make sure you have them clarify whether it is refunded if your mortgage does not go through. They should agree. If not, move on.
Save yourself some hassle and heartbreak by knowing where you stand before you go through the mortgage application process. The process is long and painful, especially with traditional bricks and mortar banks. I firmly believe traditional banks have gone way too far on the strictness curve, and are therefore going to lose a lot of market share to online mortgage companies.
RECOMMENDATIONS TO BUILD WEALTH
* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.
* Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their brand new Retirement Planning Calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Updated for 2017 and beyond. Rates have actually dropped since the Fed started raising the Fed Funds rate. Take advantage of the disconnect and refinance or lock in a new mortgage now if you’re looking for a home. Credit score requirements continue to remain elevated as credit remains tight for all but the best borrowers.