Are you wondering why does it take so long to refinance a mortgage? The simple answer is because lending standards have tightened tremendously since the 2008-2009 Global Financial Crisis. Underwriters are asking for more documentation to prove your income and net worth.
The banking sector lent too loosely before the crisis. Then the banks lost a lot of money when the housing market crashed. As a result, regulators locked down. Now the banking sector has increased their lending standards tremendously in this extremely strong housing market.
In 2022, the average credit score for an approved mortgage applicant was 760. And in order to get the lowest mortgage rate possible with the lowest amount of fees, you need a credit score of 800+.
Further, many banks are requiring at least 20% down, especially if you are going to take out a jumbo loan. The mortgage lending industry has really tightened, especially during the pandemic. The lending industry doesn't want to go back to the 2008-2009 financial crisis days where they experienced a wave of defaults from borrowers who couldn't afford their mortgages.
Why Mortgage Refinances Are Taking A While
In 2016, my mortgage refinance took 97 days to complete after averaging only 45 days for my previous three refinances between 2005-2010.
In 2019, I went through one of the most difficult refinances that took over 60 days to complete.
Then in 2020, I took five weeks to just get preapproved for a mortgage. I'm thankful my mortgage finally got preapproved because I was able to buy a house for a great deal that got listed just a month after lockdowns began.
So what on earth caused mortgage refinance times to skyrocket by so much since the financial crisis?
After writing dozens of posts, reading hundreds of comments, and speaking to multiple loan officers offline and online for the past 24 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. Happiness is about managing expectations.
Why Does It Take So Long To Refinance A Mortgage Today
Here are the six main reasons why it takes so long to refinance today.
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 was over 760 in 2020. 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%. Learn how to improve your credit score to 800+.
3) Bank Underwriting Militants.
During my 97-day mortgage refinance saga, I received over 10 Good Faith Estimate (GFE) 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.
Lenders 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.
With mortgage rates still historically low, there's been a surge in refinancing and home buying demand post pandemic. This is a huge positive for the economy. The Federal reserve has promised to stay accommodative. And with Biden as President, he has promised to unleash trillions more in stimulus aid.
As a result, refinance applications are put on the backburner compared to home purchases. Banks purposefully prioritize home purchases because banks understand there is always a time frame in which a transaction must get done. Otherwise, the transaction might fall out of escrow.
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.
For the lowest mortgage rates, check out Credible, my favorite lending market place where qualified lenders compete for your business. When lenders compete, you win.
6) Understaffing Due To Layoffs.
It's estimated that some ~10 million people have lost their jobs directly because of the financial crisis and the coronavirus pandemic. 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. When there are bottlenecks due to staffing, no matter how attractive a borrower you are, it will slow down to mortgage refinancing process.
7) Negative Real Mortgage Rates
Mortgage rates have come up from their 2020 bottom, but they are still quite low. In fact, real mortgage rates are now negative given inflation is much higher than the average 30-year fixed rate mortgage.
Given inflation is so high, it's almost like borrowing free money. Inflation whittles down the cost of a mortgage for you. Therefore, demand for taking out a new mortgage or refinancing is high.
That said, now that mortgage rates are moving higher, banks are becoming even more stringent. Further, less people are able to qualify for a mortgage now because higher incomes and down payments are required.
Slow Mortgage Refinancing Is Here To Stay
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.
Build Wealth Through Real Estate
It takes so long to refinance a mortgage today because demand is strong. Once you own your primary residence, you are considered neutral real estate. To make money in real estate, you need to invest in rental properties, REITs, or real estate crowdfunded projects.
My favorite way to invest in real estate is through real estate crowdfunding. After I sold one rental in 2017, I reinvested $550,000 of the proceeds in 18 real estate crowdfunding projects across the country. Now I earn income 100% passively as a stay at home dad.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore. By investing in real estate crowdfunding, you don't have to apply for a mortgage and wait forever to refinance a mortgage. The sponsor does all the legwork for you so you can earn passively. Real estate is the best inflation play due to rising rents and rising home prices.
Why Does It Take So Long To Refinance A Mortgage is a FS original post. As mortgage rates rise, lenders will be even more stringent on who to give mortgages to.