The recent surge in home values has homeowners throughout the U.S. basically sitting on a sizable bank account. These funds can be used to improve your home’s resale value by renovating the kitchen or putting on an addition, or to consolidate high-interest rate credit card balances at a much lower rate. If you have college-bound kids, you can use the money to pay some of those eye-popping tuition bills. After all, aren’t they your most important investment?
The next question is: what are your best loan options? To answer it, start by calculating your loan-to-value ratio (LTV). The LTV is how much you owe on your house divided by how much it’s worth. If you owe $200,000 and your house is worth $600,000, the LTV is 33%. If you owe $400,000 and your house is worth $450,000, then the LTV is approximately 90% (88.88% to be exact.) Generally speaking, if your LTV is above 80%, you’re in the high LTV range.
Once you determine your LTV, you can begin to consider your financing choices. There are two basic categories of mortgages: Agency loans and Non-Agency loans. An Agency loan is one that is either insured or purchased by one of the government-sponsored enterprises, Freddie Mac or Fannie Mae, or other government agency such as FHA. Agency loans typically carry lower interest rates but are held to more strict and narrow qualifying criteria. For example, borrowers need to be able to produce a W2 to demonstrate they’re employed and that they have the income to repay the loan. Agency refinances for high LTV transactions — typically 80% and above — require Private Mortgage Insurance, an extra layer of protection in case the borrower defaults. PMI is expensive and effectively reduces the borrower’s ready cash flow every time he or she sends in a payment.
Non-Agency loans have a different set of eligibility requirements because they fall outside the government mortgage apparatus. After a lender originates a Non-Agency loan, it is sold into the private investment market. Lenders offering Non-Agency loans are still required to confirm the borrower’s ability to repay. However, they have more flexibility in terms of how to determine income and cash flow and therefore do not always require a W2. This means a Non-Agency higher LTV refinance may be the only option for homeowners who are self-employed, contract workers, entrepreneurs and business owners. In such cases, a Non-Agency lender will typically use 12 or 24 months of bank statements to validate borrower income. Non-Agency loans may also be an option for home buyers with limited credit or who are rebuilding their credit. An additional benefit of a Non-Agency loan for a high LTV refinance is that there is no private mortgage insurance (PMI) requirement.
Another factor to take into account, is the size of the refinance. The Agencies have significantly lower limits on loan amounts than Non-Agency loan providers and don’t offer “jumbo” loans. Every year, the Federal Housing Finance Agency (FHFA) sets the maximum lending amount for an Agency loan. Currently, that amount is $548,250 for most US cities. It may be higher in certain geographies where real estate is pricier. Any loan above that amount is considered a jumbo. While the loan limit for Non-Agency cash-out refinances varies depending on the product, it can go as high as $3 million.
Are Non-Agency rates higher? Yes, Non-Agency rates are typically nominally higher than an Agency loan. That said, just like Agency loan rates, Non-Agency rates vary up and down with each lender based on factors such as the LTV, the borrower’s FICO score and the amount of the loan.
If you decide to go with a Non-Agency high LTV refinance, you’ll need to find an independent mortgage broker or lender that offers them. The good news is that thanks to companies like Deephaven, Non-Agency loans have become more mainstream and are now readily available in virtually any market. To prepare for the application process, the loan officer will ask you to gather up recent bank statements and other documentation relating to your financial situation and obligations. He or she will then submit the application to a Non-Agency mortgage provider.
It’s always a good idea to educate yourself as much as possible and to speak with a lending professional who can help guide you to the right Higher LTV Refinance option for you — especially now that you know you actually have options.