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Lenders fight over those with good credit ratings

The Baltimore Sun

Remember trying to refinance during the real estate boom? You were lucky if your broker or lender returned your calls within two weeks.

How that has changed since the bust of the subprime market last year.

Traditional borrowers - meaning those with good credit, not too much debt and enough equity in the home - are in the driver's seat right now.

"You can find yourself in a situation where mortgage lenders or brokers are climbing over each other" to get your business, says Frank E. Nothaft, chief economist with mortgage giant Freddie Mac.

Refinancing has recently ticked up as interest rates have ticked down. If you're thinking about trading in your old mortgage for a new one, you likely can count on better service now. Some mortgage experts suggest you might even have enough leverage to get fees waived or even negotiate a slightly lower interest rate.

"The question is whether ... profit margins are cut so thin that they aren't able to do it," says David Pulford Jr., president of the Maryland Mortgage Bankers Association. "It doesn't hurt to ask."

This is a major shift from just a few years ago, when the mortgage market was booming. Brokers and lenders weren't about to spend time haggling with you when there was a long line of other borrowers waiting, says Keith Gumbinger, vice president of HSH Associates, a provider of mortgage information.

Forty percent of the business back then came from subprime borrowers and others who, for one reason or another, didn't quite qualify as a "prime" borrower, Gumbinger says. That business has dried up. And lenders and brokers, some of whom entered the market during the boom time, are left to compete for the traditional borrowers that remain.

"Those borrowers are the key to survival today for many firms," Gumbinger says.

Eileen Fitzpatrick, a spokeswoman with Freddie Mac, has experienced the difference between refinancing then and now.

When she refinanced in 2003, the process took up to two months.

"You really had to stay on the lender. You had to keep calling and following up. They were so overwhelmed," she says.

She refinanced again about two months ago, partly to tap the equity in her home to refurbish a kitchen. This time it took less than a month and the lender waived a fee.

"When they saw our credit score they were just over the moon," she says. Her lender was much more attentive this time.

"I started getting annoyed with him constantly calling me with updates," Fitzpatrick says. She wanted to tell him, "Just let me know when I can have my money."

This is not to say you have to be fiscally perfect these days to refinance. Many subprime borrowers are now refinancing into FHA loans that don't require stellar credit. And other borrowers, say, with mediocre credit scores or not much equity in a home can refinance, too. In those cases, it just might take more time or borrowers may pay a slightly higher rate, mortgage experts say.

So who are the desirable borrowers today whose applications are likely to sail through? Here's what lenders are looking for:

Solid credit scores. A credit score about 620 once was good enough. Now lenders like to see a score of 680 or higher on a scale of 850. That score is not that unusual. Fair Isaac, creator of the widely used FICO score, says half of consumers have a score of 720 or higher.

Must have equity. It used to be easy to borrow the full value of the house. Now the ideal refinancing candidate has 20 percent equity in the home. And the loan should be no larger than 80 percent of the home's newly appraised value.

Good debt-to-income ratio. Lenders look at the size of your monthly debt payments in relation to your income. Debts in this case are auto loans, student loans, credit cards and the mortgage.

Debt couldn't be more than 55 percent of gross monthly income under the old rules. Now debt needs to be about 42 percent to 45 percent of income.

On top of that, lenders want to see cash reserves that equal about six months' in living expenses, says Charles DiPino, vice president of Universal Trust Mortgage Corp. in Columbia. This could be money parked in the bank, a brokerage account or even a 401(k) that can be tapped in an emergency, he says.

Before refinancing, do a little advance legwork.

"Make sure you talk to at least three different lenders," says Freddie Mac's Nothaft. "Don't just apply to the one guy who is persistent and keeps talking to you."

Compare their interest rates and other costs. Look for room to negotiate.

"Can you ask for concessions or a fee waiver? You can," Gumbinger says. "You do have to be realistic. Your sales rep doesn't necessarily have the authority to negotiate fees and many of these fees are beyond his control."

The biggest mortgage costs, Gumbinger adds, are interest and percentage-based fees, such as points.

If you've done your research, you may see a slight difference in interest rates on comparable loans, he says. While there's not a lot of room to move on traditional mortgages, ask a lender if it can do better than a competitor, Gumbinger suggests.

"Give it a shot," agrees Freddie Mac's Fitzpatrick. "The lender doesn't want you to take a good loan to a competitor."

Questions? Comments? Want to share your own financial tips with readers? Contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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