Ever wondered why refinancing a mortgage seems to take forever? Well, it’s largely due to the stricter lending standards that were put in place after the 2008-2009 Global Financial Crisis. Banks got a bit too generous with their lending before the crisis, and when the housing market crashed, they lost a ton of money. So, to avoid a repeat of that disaster, they’ve tightened up their lending practices, especially in today’s robust housing market.
In 2022, the average credit score for someone who got approved for a mortgage was 760. But if you want the best mortgage rate with the least amount of fees, you’ll need a credit score of 800 or more. Plus, many banks now require at least a 20% down payment, especially for jumbo loans. The lending industry has really clamped down since the pandemic, as they don’t want to relive the financial crisis days when they were swamped with defaults from borrowers who couldn’t afford their mortgages.
So, why does refinancing take so long these days? Well, in 2016, my mortgage refinance took 97 days to complete, which was more than double the 45-day average for my previous three refinances between 2005-2010. In 2019, I had a particularly tough refinance that took over 60 days. And in 2020, it took me five weeks just to get preapproved for a mortgage. Thankfully, I was able to buy a house at a great price that was listed just a month after lockdowns began.
But why have mortgage refinance times increased so much since the financial crisis? After a lot of research and conversations with loan officers, I’ve identified six main reasons:
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Government Imposed Standards: After the financial crisis, the government had to bail out America’s largest financial institutions, including Bank of America and Citibank, which each received about $45 billion in taxpayer money. This didn’t sit well with the public, so politicians decided to impose stricter capital standards on banks.
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High Credit Scores Required: The average credit score for an approved mortgage applicant was over 760 in 2020. That’s 40 points higher than what’s considered an "excellent" credit rating. So, if only "excellent" people can get approved for mortgages, what happens to everyone else?
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Bank Underwriting Militants: During my 97-day mortgage refinance saga, I received over 10 Good Faith Estimate (GFE) packages. Each GFE contained 6-7 pages of information, which quickly became irrelevant when I received another one, and then another one. Lenders never ask for all the documents at once, which really slows down the process.
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Tight Mortgage Secondary Market: The mortgage-backed security market is still recovering, and demand for such products is nowhere near as high as in 2007. This makes banks more hesitant to lend in the primary market.
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Flood Of Home Buying Applications: With mortgage rates still historically low, there’s been a surge in refinancing and home buying demand post-pandemic. This is great for the economy, but it means that refinance applications often get put on the backburner compared to home purchases.
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Understaffing Due To Layoffs: It’s estimated that about 10 million people lost their jobs because of the financial crisis and the coronavirus pandemic. Many of these jobs in finance and real estate won’t be coming back, which means many mortgage departments are understaffed and overworked.
So, if you’re planning to refinance your mortgage, be prepared for a three to four month long process. But don’t let that discourage you. I’m very bullish on housing over the coming years, and the mortgages that are taken out or refinanced today will be of lower risk of default in the future.
Once you own your primary residence, you’re considered neutral real estate. To make money in real estate, you need to invest in rental properties, REITs, or real estate crowdfunded projects. My favorite way to invest in real estate is through real estate crowdfunding. After I sold one rental in 2017, I reinvested $550,000 of the proceeds in 18 real estate crowdfunding projects across the country. Now I earn income 100% passively as a stay at home dad.
So, why does it take so long to refinance a mortgage? It’s because demand is strong. But remember, real estate is the best inflation play due to rising rents and rising home prices. As mortgage rates rise, lenders will be even more stringent on who they give mortgages to.
