Can’t Refinance Your Mortgage? An Owner-Occupied Loan May Be At Fault

Have you tried to refinance your mortgage and were denied? An owner-occupied loan on an upside down mortgage could be why you can’t refinance your mortgage. 

Q: I listen to you on Sundays after I leave the station on my way home.

I have a real estate question that I hope you can answer since nobody has been able to yet.

 My wife and I purchased a townhome in May of 2006. Our mortgage rate was about 6.5 percent. We lived in the townhome until this past May when we bought our new home.

 Since we were upside down (thanks market!) we decided to go with a developer who offered to rent our property if we bought a new house. We still own our townhome, and the current rent covers the whole mortgage, but we would like to refinance and make a little money each month off their rent.

Here’s the problem. Everyone we call about refinancing tells us we’re denied but they do not have information as to why. We tried our current home’s builder/lender and a few others with no luck.

Any idea why we would be denied? My wife said there’s a special mortgage refinance option for people who are upside down, a category we fall into, but we still didn’t qualify for that special financing. We have never missed a payment and have no liens or anything negative on either home. Our credit is fantastic and we have no debt.

Any help you can offer would be greatly appreciated!

A: We wished you had asked this question while you still lived in your old home and before you had closed on the new home.

If you’re upside down, and want to refinance, you may have qualified for a HARP refinance through MakingHomeAffordable.gov. As an owner who occupies the property, you might have been able to lower your interest rate a couple of percentage points. While you might have started the clock on the refinance all over again, thus incurring more interest overall, at least you’d be setting yourself up for a long-term, profitable rental.

Unfortunately, your options as a landlord who is upside down on the property are more limited. Your current lender sold you an owner-occupied loan, and not an investment property loan.

No other lenders will want to refinance a loan that is underwater, so your only move would be to pay down enough of the loan so that not only are you above water, you have a decent amount of equity. Most lenders want to see investment properties with at least 20 to 30 percent equity.

If you don’t have the cash to make that down payment, then you will probably be stuck with what you have. The silver lining is that the rent should rise over time, hopefully faster than the property taxes and maintenance you’re paying. And, don’t forget you’re at least covering your expenses – that’s a darned sight better than what many “forced” landlords are experiencing.

In addition, the deal the builder gave you allowed you to rent your home and buy a new place. That deal did not guaranty that you would be able to lower your interest rate on your loan. Unfortunately, your options are pretty limited at this point.

Thanks for your email and good luck.


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