Why Does It Take So Long To Refinance A Mortgage?

Green Apartments In MaltaMy last mortgage refinance took 97 days to complete after averaging only 45 days for my previous three refinances between 2005-2010. So what on earth caused mortgage refinance times to skyrocket by 100%?

After writing dozens of posts, reading hundreds of comments, and speaking to multiple loan officers offline and online for the past 18 months, I’ve come with six definitive reasons as to why refinancing a mortgage now is as fast as a stampede of turtles running through peanut butter.

If you plan to go through a mortgage refinance, mentally plan for a three to four month long process. If the refinance gets done sooner, then great. If not, your expectations have already been set.

MAIN REASONS WHY MORTGAGE REFINANCING TAKES SO LONG

1) Government Imposed Standards. The governments had to spend hundreds of billions of dollars to bailout America’s largest financial institutions. Bank of America and Citibank alone received roughly $45 billion dollars worth of taxpayer money each. The public was pissed, and given politicians need public support remain in power, politicians decided to “get tough on banks” by imposing stricter capital standards. Some impositions include: 1) higher tier 1 capital requirements, 2) the banning of proprietary trading, 3) year end bonus limits, 4) higher return metrics, and 5) much more paper work! Whenever the government is involved in anything, expect inefficiencies thanks to bureaucracy and greed. Compare the United States Postal Service to Federal Express, and you get the idea.

2) High Credit Scores Required. The average credit score for an approved applicant is over 760. 760 is 40 points higher than what is considered an “excellent” credit rating. If only excellent people can get approved for mortgages, what about the rest of the non-excellent population? A huge factor in achieving a high credit score is time. This is why those with 760 credit scores and higher are usually in their 30′s or older. The only people I know with over 800 credit scores are in their 40′s as well. This means the 20-something demographic is getting shut out! Furthermore, to improve from a 680 credit score to 760 often takes at least two years if not longer. Even if you have a 760+ credit score, you still need to come up with a 20% downpayment, and have a debt to income ratio below 33%.

3) Bank Underwriting Militants. During my 100 day mortgage refinance saga, I received over 10 Good Faith Estimate packages required by the bank (thanks to the government) to send when even the smallest assumption is changed. Each GFE contained 6-7 pages of information which soon becomes irrelevant when I get another, and another. They never ask for all the documents at once. It’s always in piece meal, which delays the process tremendously. It’s as if they are purposefully delaying the process to fit in more applicants! The mortgage underwriter is turning into Sherlock Homes, asking for every single documentation possible: insurance, student loans, K-1′s, alternative assets, etc. Underwriters often ask for documents multiple times because it takes them so long to do their due diligence that the previous documents they requested have passed the time of approval (appraisals, paychecks, etc).

4) Tight Mortgage Secondary Market. The mortgage back security market is still thawing as demand for such products is nowhere near as high as in 2007. As a result, banks cannot offload their risk in the secondary market, which makes banks more hesitant to lend in the primary market. It’s all about credit risk for banks. For example, there is no condotel mortgage market anymore. As a result, condotel property volume has shriveled to a halt and only cash buyers are able to buy those wonderful Ritz Carlton properties up in Lake Tahoe. Soon, this mortgage type will open up, and you will make some returns, but you need the cash first!

5) Flood Of Home Buying Applications. This is a huge positive for the economy. I’ve received plenty of feedback from different banks that they are seeing a DELUGE of new mortgage applications. As a result, the refinance applications are put on the backburner because there is almost always a financing contingency during a home purchase transaction. I generally see 30-45 day contingencies, compared with 60-90 day lock flexibilities for mortgage refinances. Rising new mortgage applications is a leading indicator for the economy.

6) Understaffing Due To Layoffs. It’s estimated that some ~10 million people have lost their jobs directly because of the financial crisis. Most of these jobs in finance and real estate will not come back thanks to lower profitability. As a result, many mortgage departments have lower staff for similar work than before. Employees everywhere are complaining about doing more with less and with the same or less pay. Banking is one of the most impacted industries over the last five years and they it will continue to shrink. Expect the next three months to see some massive hemorrhaging.

GET USED TO THE NEW NORMAL

Gone are the days of 30 day mortgage refinances. I expect the new normal to be 60-80 days on average for the typical approved applicant. Mine took 20 days longer than the new average because of my credit score screw up. Once we set our expectations, our frustrations about the process should improve.

I’m very bullish on housing over the coming years and so should you. The mortgages that are taken out or refinanced today will be of lower risk of default in the future. Eventually, banks will get loose again, and when you start hearing about the return of NINJA (No Income No Job Apps), negative amortization loans, and HELOC parties, then you know it’s time to consider cashing out on your gains.

Photo: Apartments Of Malta, 2011, Sam D.

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    When I did mine last year it was pretty straightforward, more so than I had imagined. They only required one piece of additional documentation from me after the initial dump of everything on the list. I will say that I did have to call them for it! They had an online ‘status’ form and this new item appeared on there, but it was really vague and they never called/e-mailed/contacted me about it, but when I called and asked, they told me and I had it to them within an hour.

    I think you also have to mention to that every mortgage application is different. They might have standards and such but everybody has a different situation that ends up requiring a slightly different process. That’s probably why there’s the appearance of little consistency.

  2. says

    The mortgage process in general needs major overhauls, each underwriter has their own requirements, each lender/broker has their own system for document collection, there are varying number of third parties involved depending on the state your mortgage/refi is in, from title companies to lawyers, closing agents and appraisers.

    I think the process would become much more efficient if the large lenders organized a application processing and underwriting company similar to what MERS is for tracking note ownership after the loans are issued.

  3. says

    I’m looking at a re-fi in the new year and am fully prepared for frustration, last second panics, frustration, weird requests, and frustration. I don’t know if it’ll match the dark comedy near the end of closing the purchase loan on this house though – the escrow company sent a courier to my work to collect a check for the twenty-five cents I was short. Go figure.

    • says

      I think if you can just mentally bake in 100 days and all that stuff, you’re going to be fine.

      I haven’t heard of many cases where one goes through 2+ months and then gets rejected. Good luck on the refi!

      • says

        I applied for re-finance in late November 2012. I am still waiting. I had to get an apprasial twice, had to pay the first one before they could order the second one. Had to get a surve; have to send a copy of my banking statement every month. Have to show that I have at least 5500. in savings. Untouched, still there month after month. I am still waiting, here is is the start of May 2013. Have not heard anything. I usually contact them just to see if they are still there, and that is when they ask for new cooy of bank statement. I think its just to entertain me. Going on six months. House might be paid off by the time they get done.

        • says

          Wow, that is a long time. Why not check with Quicken Loans and see if you can get a competing quote. Then go back to your bank and put the pressure on? It’s free so no sweat off your back while you wait. Rates have actually DROPPED in the past six months with the 10-year yield at 1.72% now as of 5/5/2013.

  4. says

    I finally convinced my mother to refinance and she’s saving a couple percent. She lost her home equity line in the process but that’s a blessing in disguise as she used that as a crutch way too much. It takes time to go through the whole refinancing process but it’s really worth it when the numbers work in your favor.

    • says

      I think losing the HELOC is a blessing in disguise for sure! Less debt, she got the refi done, will live within her means, and you can obviously help her out if she has a liquidity crunch. Good job mama!

  5. says

    Usually after disasters like this, there is a swing toward conservative rules and underwriting. Not exactly a bad thing, but I wish it was sooner and a little less restrictive. Before the housing bubble burst, almost everyone was approved! No income verification was a major part of it. Too many buyers because everyone was approved helped create the frenzy. Now cash is king! Banks are checking and double checking to avoid another disaster.

  6. Grandpa says

    You went to the wrong place. I refied with ING Direct a year ago, was ready to close in 2 weeks, closing took 20 minutes in my own home, and the closer said it was the least amount of paperwork he had ever seen. Got 2.55% biweekly 5 year loan. Just paid it off last week.

  7. Eli says

    Thanks for this, I thought it was just me. I’m on my third re-fi, and I had to extend the closing date by a month (and will likely have to again by another). The first two re-fis (2009, 2011) closed with no issues within the 60-day lock periods.

    • says

      Eli, it’s definitely not just you. It’s the large majority of people refinancing. It’s getting better though with the recovery in the economy. Banks will have to get more aggressive of they want to maintain market share.

  8. says

    We refi’d a year ago and it was absolutely terrible. Not only did we barely get it done in the time window that we needed (the 90 day rate lock was important for a couple reasons for us), but there were actually mistakes in the HUD that needed to be addressed after closing. The bank ended up cutting us a check for almost $2K after the closing because their loan processor was inept. Granted, it was $2K of our own money, so it wasn’t really a profit on our part, but it was still ridiculous that I had to be the one making sure the HUD was correct.

    • says

      Thanks for sharing. The 90 day rate lock is the line in the sand…. and I think more and more people will reach that 90 day mark, and maybe longer if there are more hiccups. The bank eats any delays at that point. Glad you got your 2K back!

  9. says

    Banks with over $220 billion assets are required to be BASEL compliant. BASEL has strict tier 1 and 2 capital requirements. When you add Dodd-Frank law to that, it’s not hard to imagine why it takes so long to refinance.

  10. says

    Our last refinance took 6 months. We signed up for a “speedy” refinance through the same company. It was supposed to be streamlined, but I think we hit all the snags you mentioned. Since I own a business, they had to go over everything with a fine tooth comb, even though we have higher than average income and almost 800 credit scores. Previously, they never really paid much attention to the business reports. I guess it is good to make sure borrowers have appropriate income to support their loan, but it really is a penalty to those of us who have good payment history and credit scores to take such a long time to get things done. If this was the streamlined process, I’d hate to see the long version.

    • says

      Wow, 6 months is the longest I’ve ever heard Kim! That must have been SO PAINFUL to have all your business finances looked over in so much detail. My 100 days seems like a walk in the park compared to yours!

      I’m glad you got it done. On the bright side, there will be much less mortgage defaults in the future!

  11. says

    Just completed my 4th refi a couple of weeks ago. Stayed with the same local bank that I currently had mortgage with, and it still took a little over 2 months! They already had all of my information on file – yet I still had to jump through all kinds of hoops to complete the process. It was very irritating. I recall, the previous refi at the same bank (2 years ago when I was new to them) closed in less than 2 months.

  12. says

    We just finished our refi in September at 3% (no points) for a 15 year fixed. It took over 3 months start to finish going through our local credit union, which really surprised me. I have a feeling this will be my last refi as can’t see rates going lower than 3%…but then again, that’s what I said when we bought the house 3.5 years ago @ 5.25% for 30 years!

  13. says

    My friends just bought a house this year, and they figured out that if rates drop by a half percent, they’re still better off just making multiple mortgage payments instead of refinancing. Does that make sense to you?

      • ann s says

        Are you saying one million per year? and if so, this is a small mortgage?
        If anyone wants to forgo claiming the deduction for owing on a property, do it.
        The majority of us serfs work very hard to have a modest house and the deduction encourages home ownership rather than rental. It is often offset by home upkeep and improvements.
        If you have ever lived in both areas-you know the difference in the quality of life, the people, the schools, the food, the public services, etc.
        With some exceptions, i will admit, but those are select areas that have a particular and pretty exclusive part of the pop renting-artists, downtown major metro, few rentals in majority homes that are kept up, etc.
        So, what is the shame?

  14. says

    Despite repeated warnings about possible delays from the refinance company, my refinance just finished in 1 month (22 business days) – my finances are not complicated and I am not over-leveraged, so it was probably easier for them to approve me, but I guess results vary a lot depending on the situation!

  15. says

    I closed on a no-cost refi last month and it took under 45 days from start to finish. I was quite surprised that they didn’t want more bank statements or pay stubs as we got closer to closing and it was quite straightforward! I would definitely go through Quicken Loans again and would never consider going with a traditional brick and mortar bank (my purchase loan was with a local credit union). I’ll take a look at the rates again in another few months – maybe it’ll be worth it again if the rates keep going down. Then again, I’m now at 2.5% on a 5/1 ARM, so that seems unlikely…

  16. Greg says

    When we refinanced our mortgage last year, it took over three months. There seemed to be a flood of paperwork to submit and complete. I wondered if the mortgage would ever happen. It did go through eventually but I think the banks are being extra cautious now.

  17. waiting???? says

    I filled my refinance application back on 11/2013 and I’m still waiting for the underwriter to reply. It’s almost 5 months.

  18. ann s says

    Bull ****! This article is based on accepting the new normal. Citibank, and others, were bailed out, it is my understanding that has been paid back AND they made billions in profits.
    Why then would it be acceptable to wait that long for a loan to be processed? The bank should be expecting the increase and staff accordingly-after all, they do have the money, why not re hire those they laid off?
    The ideal that a new loan should push a refi out of line is ridiculous. That refinance is just as much a customer as the new loan, they are going to make additional money from it. Why would it EVER be ok to accept being pushed off so they can work with those who are going to make them more money? Or not-probability is bankruptcy, esp with lo down payment-then they will pay one half of original loan.
    The other little item is THEY mailed me an invitation to refinance.
    So, I agree to disagree with your “accept it, it’s just the way it is” stance.
    i am asking to contact my underwriter and find out exactly what the process is that is taking longer than 30 days. My loan processor assured me everything was in.She emails me weekly and the last one she stated there were no problems she knew of
    Are these people sequestered!? When my Loan person replies like this, I asked to have the email of the underwriter responsible for my loan. I can ask them directly what is going on that is taking so much time, tell me your process, assure me I have all the correct paper work in.
    If there is a problem, tell me now as i believe this process can take a few days to 2 weeks to complete.
    My husband went through the same deal with Thrivent-the refinance was closed in 10 days.
    Accepting obvious disrespect is not acceptable to me.
    Can i change it? Probably not , but they are going to hear from me.And so is the Attorney general, as I believe they have gotten by with very poor customer service way too long.

  19. Traci says

    We are on day 110 and still no anticipated closing date. Just got off the phone with a very ugly loan representative who tells me the same thing over and over. It’s in underwriting!! At first they said it would take about a week in underwriting, now saying 60 days. What a crock, they will not even let me speak to an underwriter or e-mail them. Everything should be in, they are the company that services the current loan.

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