Back in 2015, I was rejected for a mortgage refinance. Banks didn't even offer me a higher rate. They simply refused to refinance my loan. I was a mortgage refinance failure.
Let me share with you my experience so you can increase your chances of refinancing or taking out a new mortgage at a great rate in 2023 and beyond.
With bank failures at Signature Bank, Silicon Valley Bank, Credit Suisse, and First Republic Bank, lending standards continue to be very tight. Therefore, it's important to get the highest credit score possible to give your chance at getting a mortgage, let alone one with the lowest mortgage rate.
Here's my mortgage refinance failure story.
My Mortgage Refinance Failure: What Happened
It's official. I've failed in my attempt to refinance a $1 million 5/1 ARM mortgage from 2.625% down to 2.25%.
Am I disappointed? Yes. But am I surprised? Not really. Bank lending continues to be extremely tight post the financial crisis. I wish all freelancers, contractors, and folks looking to minimize their debt only the best of luck!
Financial failure is great because it allows us to learn from our mistakes, make better decisions, and get wealthier over the long term. I've got a whole list of financial mistakes I've made in the past if you care to take a look.
I'm of the belief we should always take action to improve our finances. Letting the housing market increase or decrease in value doesn't take any effort once a property is purchased.
But imagine experiencing an effortless increase in property values while putting some legwork into reducing mortgage costs. That's a winning combination.
This post offers up some plain truths as to why I failed, and what I plan to do about it. Maybe you're having a tough time refinancing yourself? This post may offer some comfort, hope and direction.
Reasons Why My Mortgage Refinance Failed
1) Went with a new bank where I have no relationship.
After checking for the latest mortgage rates online, I used the knowledge to see if my old mortgage officer at Citibank could help me out at his new employer, JPM Chase. Citi couldn't match a 2.25% 5/1 jumbo ARM, but JPM Chase could. I erroneously believed my mortgage officer would have some influence in the refinance process. Wrong.
You'd think that winning a $1 million mortgage refinance and potentially building new business through the JP Morgan Chase private client channel would be enticing for Chase to approve my loan. I guess not.
My mortgage officer was nothing more than a salesman to get me in the door. Once I was in, I was at the mercy of Chase's underwriting department.
2) Went with a brick and mortar bank.
I've come to the conclusion that big banks are becoming uncompetitive. Big banks don't have technological efficiency.
Banks went from one extreme of lending to anybody with a heartbeat, to only lending to those who don't need a loan! Bank inefficiencies are why fintech companies are gaining popularity amongst investors and consumers. Who needs a big bank when the internet can dis-intermediate and lower costs.
Furthermore, JPM Chase is in the middle of paying $13 billion in penalties for selling “bad mortgaged-backed securities” before the financial crisis (along with Citi, BoA and others). The money is supposed to go to struggling homeowners as part of a consumer relief program.
I'd love to hear from you if you've been a beneficiary of such funds. So long as big banks are paying large fees, their lending standards will be super tight because the government is looking over their shoulders.
3) My finances weren't strong enough.
Let's be frank. If I had several million in the bank or increased my income to $500,000+, my refinance would have gone through. But because I bought another house last year, I added $990,000 in mortgage debt to my balance sheet for a total of four mortgages.
Furthermore, I don't have two years of contracting income under my belt. Therefore, 100% of all income earned between November 2013 – now DOES NOT count.
Finally, I've structured my online business so that I've been earning a relatively small salary to comply with the minimum income rules of running an S-Corp, while the rest of the proceeds go elsewhere. My goal is to always keep my gross income around $250,000.
With my passive income and deferred compensation from my old employer, I really can't afford to pay myself much. Unfortunately, by engineering an income to comply with the ideal income for maximum happiness, I ended up hurting my refinance chances.
Chase Bank Missed Out On My Business
For over 10 years, I've paid my mortgage on time. The refinance would have reduced my monthly payment by roughly $500 ($300 in interest), making my default risk even lower. Furthermore, my loan-to-value ratio is under 35% compared to the usual 80% LTV when people put 20% down to buy a home. Getting rejected when I have over 65% equity in my home and an excellent credit score is pretty ludicrous.
Banks also have a stringent way of calculating rental income. For example, despite receiving $3,800 a month in rental income from another property when reviewing my cash flow, JPM Chase can only take 70% of that amount in their underwriting calculation ($2,660) to account for potential losses or vacancies. This is despite having zero vacant months for 10 years.
Further, despite my mortgage only being $1,308 a month ($1,208 is principal), the underwriter calculated a monthly LOSS from my property! Fuzzy math.
Finally, given the stock market, real estate market, and almost everything else have continued to move up over the past year since I purchased my house, my overall net worth has also risen by a healthy amount as well. Unfortunately, they have no idea that several comparable homes in my neighborhood have sold for 50% higher in terms of price for square foot. Only I care about such detail.
If JPM Chase accepted my refinance, I would have paid my mortgage on time for five years in a row. I also would have transferred at least $250,000 in assets into deposits. Finally, I would have referred several other people to JPM Chase to refinance their loans. Now, no way.
What I Plan To Do After My Mortgage Refinance Failure
Failure is a part of life. What counts is what you do after failure. Here's how I plan to improve my financials and how you can increase your refinance chances if you find yourself in the same boat.
1) Pay off other rental property mortgages.
I'm on a mission to pay off $92,000 of a rental property I bought with roughly $450,000 in debt in 2003. I thought I'd be done with paying off the mortgage after 10 years, but I didn't stay focused in slaying that beast. The mortgage rate is only 3.375%, but it's still ~1.4% higher than the 10-year risk-free rate of return.
By paying this debt off completely, my cash flow improves by more than the $1,300 a month mortgage payment because of the funny math by bank underwriters. No debt significantly increases the wholeness of your income. Furthermore, my total mortgage count goes from four to three.
Action plan for you
Try to completely pay off one higher interest debt before trying to refinance. Paying off 90% of one debt is as bad as still having 100% of debt left in the underwriter's eyes, i.e. having $10,000 left in a $100,000 mortgage is just as bad as having a $100,000 mortgage.
2) Stick with my main bank.
Even though bricks and mortar banks are falling behind, I've got a 15 year relationship with Citibank. They've got a couple of my mortgages, a sizable private wealth management account, an unsecured line of credit, a savings account, and a checking account.
The next time rates fall off a cliff, I'm just going to stick with Citibank. I won't bother going through the process with another bank. Doing business with a familiar bank is so much easier.
Action plan for you
Banking is a relationship business. The longer your relationship is with one institution, generally the more favorable the terms. The more account types you have open with a bank, the more lucrative you are as a client. There can still be difficulties of relationship pricing when refinancing.
However, typically it's best to stick with the bank where you have the most assets and accounts. Of course, I'm still going to check the latest mortgage rates online first, to keep them honest!
3) Earn a higher income before planning to refinance.
Although I began consulting in November 2013, I didn't get paid until January 2014. This means that my two year anniversary of having my freelance income count is in January, 2016. During a refinance, banks always ask for the last two paystubs. They might even ask for the last three months, but I've yet to come across this scenario during my ~8 previous refinances across multiple properties.
I'm going to bump up my salary from <$5,000 to $25,000 a month for two months to prepare myself once again for a mortgage refinance while paying myself peanuts until then.
Alternatively, I can just pay myself $25,000 a month for two months prior to when I think rates will collapse, but who knows exactly when that is? For those who think I'm misrepresenting a higher income, I can actually pay myself much more than $25,000 a month.
Instead, I'm giving the rest of the money to someone else as I don't want to earn more. The downside of a high income is paying more employer FICA tax.
Action plan for you
Plan out your finances according to an estimated refinance window. For those of you with regular W2 income jobs, perhaps temporarily take on a second job or freelance work to bolster your income for months leading up to the refinance. You might not time the refinance perfectly, but if you haven't refinanced in years and you can refinance now for at least 0.5% lower, then you don't have to time the refinance exactly for the lowest rate possible. You're in the money!
All you need to do is have a second job or do freelance work for two months before you apply, and hold that job for the duration of the mortgage refinance process (2-3 months). After your refinance is done, you can quit.
You're asking yourself what happened to having two years of income history for any source of income to count. Well guess what? Even if your income history doesn't officially count, banks still want to see as much income as possible over the past two months.
JPM Chase asked me for all my freelance pay stubs, and bank statements showing the inflow of those pay stubs even though they said they can't be included. My mortgage officer then wanted me to write a 700 word letter explaining why I wanted to refinance, and why I was working as a freelancer, instead of working for them full-time etc.
Being A Mortgage Refinance Failure Stinks, But Oh Well
It's sobering to get rejected by JPM Chase. I never failed in multiple mortgage refinance attempts before with Bank of America, Citibank, and Washington Mutual (when it were still around).
I barely was able to get a 2.5%, 5/1 ARM loan to purchase another house in 2014. Therefore, it's not a complete surprise that I was denied in 2015. The thing is, I wasn't asking to take on more debt. I was asking to reduce my debt burden while my net worth increased. So it still feels bad to be a mortgage refinance failure.
For reference, according to Home Mortgage Disclosure Act data, 20% of Black and 15% of Hispanic loan applicants were denied mortgages, compared with about 11% of White and 10% of Asian applicants. As an Asian American, I guess I'm now part of the 10%!
Motivated To Strengthen My Finances Further
Due to the rejection, I will crush my other $92,000 rental mortgage by June 15 of this year. I will also make more money to avoid future rejection. Spending time talking on the phone, doing research, and gathering all of those documents for JPM Chase was a royal PITA. I could have instead spent that time producing. Oh well, at least I wrote this post.
If someone like me can pay down my entire $1 million mortgage by selling some stocks and CDs and can't refinance a mortgage, have banks like Chase gone too far? It seems so.
The upside to my rejection is that during the next housing downturn, there won't be as many defaults, short-sales, and bankruptcies because everybody will be an excellent creditor. Only the government and their FHA program of allowing only 3% down could really cause a lot of pain now.
Let's hope new legislation regarding lower mortgage fees for lower credit score homebuyers won't backfire in the end. Too many unqualified borrowers and overly aggressive lenders are what led to the 2008 housing crisis in the first place.
Shop around for the latest mortgage rate. Check the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more mortgage rate quotes you can get, the better. This way, you feel confident knowing you're getting the lowest rate for your situation. Further, you can make lenders compete for your business.
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Real estate is a key component of a diversified portfolio. Real estate is much less volatile than stocks. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer.
I've personally invested $953,00 in private real estate funds since 2016. I believe in the work-from-home trend and the demographic shift to lower cost areas of the country, where Fundrise primary invests. Real estate is favorite asset class to build wealth.
Mortgage Refinance Failure is a Financial Samurai original post.