Recently, we’ve seen endless references to tightening lending standards in the wake of the mortgage crisis. This past week I ran smack dab into one. I’ve been in the process of refinancing a short-term loan on an investment property that I purchased about a year ago. (One I bought without Rob. Shhhh.). I financed the purchase with a short-term loan, which allowed me to borrow 80% of the improved value of the property. The loan minimized the required cash down payment, but I knew I’d have to refinance the loan within 12 months.
As the 12-month mark neared, I began working with a mortgage broker to refinance the short-term loan with a secondary market loan. I finished getting the appraisal for the property, and that afternoon, I received the “Houston, we have a problem” call from my broker.
The New Rule
Apparently, lenders have instituted a new rule. They will not refinance a property if it has been listed for sale within the prior 12 months. My property had been. Sometimes, I’ll buy an investment property with the intention of holding it as a rental, but I’ll list it for sale with my real estate agent at the same time. With this particular property, I was indifferent between renting it or selling it. So I offered it both ways. Because the property rented quickly after I completed the rehab, I withdrew it from the market after the start of the lease. Now, it appears that my decision to list the property will prevent refinancing with a secondary market loan, at least for now.
Implications for Investors and Homeowners
This new roadblock to refinancing has significant implications for investors. For investors that still have the ability to obtain secondary market financing (generally, those with 10 or fewer existing mortgages), this new restriction eliminates the flexibility of doing exactly what I did–offering an investment property for resale while still maintaining the option to refinance, at least for the 12-month period after the property is removed from the market.
Unfortunately, for some homeowners, the implications are considerably worse. In the current market, homeowners often list their homes for sale only to withdraw them from the market because they can’t sell them for an acceptable price. With this new restriction, homeowners may face an unexpected problem–the inability to refinance their existing mortgages. This is bad news for those who have existing mortgages with unfavorable terms or who have adjustable or lower “buy-down” incentive rates that are set to adjust within the year following their attempted sale.
Planning for the Change
For both investors and homeowners who have not attempted to sell the property in the past 12 months, the solution is the same–planning. Both investors and homeowners will have to consider whether they may look to refinance existing mortgage loans in the upcoming year before making the decision to list their properties for sale. This also means taking a more serious look at property valuations in the current market before listing a property for sale to decide whether the house can sell for a price that they are willing and able to take.
Those who have listed their properties for sale and then withdrawn them from the market may simply have to wait longer to refinance or look at refinancing with a portfolio lender. In my case, I will be refinancing with the same portfolio lender that made the short-term loan–unfortunately at a higher (and variable) rate and shorter term than I preferred. For most homeowners, the better option may simply be to wait out the 12 months. Although a homeowner with an adjusting rate may have to make higher payments for a period of time, a portfolio lender is unlikely to provide terms competitive with a secondary market loan. And due to the costs of refinancing, a portfolio loan is unlikely to be a good temporary solution. The better choice may be to budget for the higher mortgage payment until after the 12-month period and then refinance with a competitive fixed-rate loan.
In the meantime, homeowners looking to refinance may want to stay in contact with their mortgage broker. As my latest refinance reminds me, the rules tend to change.
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