Getting Approved Before Prices Fall

For the last 4-5 months or more, newspapers have been chock full of headlines like: Are We in a Housing Bubble? 

That’s got many expecting a drop in home prices.

When home prices do fall, it makes it tougher for certain people to qualify for a mortgage—especially for refinances. When prices start dropping, appraisals come in lower, insurer valuation systems become more conservative, and lenders tighten up in general.

Vince Gaetano, a broker with Monster Mortgage, tells the Financial Post that people are already trying to get approved “before there is a correction in the real estate market.”

On that note, here are three scenarios where a small drop in home prices can matter:

• A borrower who wants a line of credit (LOC):
  If the homeowner has 20-25% equity, it may pay to act sooner than later.  That’s because LOCs require a minimum of 20% equity. If your loan-to-value is 75-80%, for example, it only takes a small drop in home values to push you above 80% LTV and keep you from getting approved.
• A borrower wanting to refinance to 90% LTV:
  90% is the maximum loan-to-value for a refinance. Suppose you’re at 85% LTV now and want to roll some high-interest debt into your mortgage. In this case, even a 3% price drop could eat up most of your equity. That could make a refinance not as worthwhile—if at all.
• A borrower looking to refinance to 80% LTV:
  80% is the maximum loan-to-value for uninsured financing (assuming you want the best rates). If your current LTV is in the high 70% range, a small price drop could push you over 80% loan-to-value—requiring that you pay default insurance to get the best rates. Exceptions apply, however, so speak with your mortgage advisor.

Long story short, if you’re in the market to refinance and you think home prices are headed south, it may pay to get your appraisal and approval soon.