Credit scores play an increasing role in refinancing

YAKIMA, Wash. -- Refinancing a home is not free, and it's not as easy as it used to be.

Yakima mortgage lenders say prospective borrowers need to anticipate those issues and a longer process before they take the leap.

In the wake of the subprime mortgage mess that shook the financial and housing markets and sent the country into recession, underwriting standards are tighter and more documentation is being required.

And credit scores definitely matter. Weaker credit means higher costs.

"Huge," is how Linda Chaplin, branch manager at Golf Savings Bank in Yakima, describes the impact of a borrower's credit score on the cost of refinancing.

A lower score -- below 700 -- can impose an additional fee equal to 1 percent of the loan amount to obtain a loan, lenders say, as a result of federal guidelines when mortgages are sold on the secondary market.

On the flip side, borrowers with scores above 740 may see some fees reduced.

The score is known as the FICO score for Fair Isaac Corp., which developed the scoring system as a way to measure a borrower's creditworthiness.

Matt and Lindy Kollman found that out when they refinanced their three-bedroom, two-bath west Yakima rambler this month at QPoint Mortgage.

The couple bought a home in Bellingham five years ago, a deal that went through quickly.

"That is when all the subprime stuff was going on. The money was flowing," Kollman recalled. "We were surprised how easy it was."

Even though the only thing that changed for the couple was an even better credit rating and a firmer financial footing, the refinance with QPoint took more time.

"It was harder to get the mortgage because people have reacted to having been burned by the subprime market," he said.

Not all lenders use credit scores. Yakima Federal Savings and Loan, because it retains all its home loans, doesn't use them. It's what's known as a portfolio lender.

Billy Fetzer, assistant vice president and downtown branch manager, said Yakima Federal looks at an applicant's overall credit history in making its lending decisions.

Outside of fees related to credit scores, borrowers should expect to pay up to 4 percent of the loan amount in closing costs. The amount may be higher if they want to pay points to obtain a lower interest rate, Chaplin said.

In addition to a standard 1 percent loan origination fee, borrowers can obtain a lower rate if they pay an additional fee.

Closing costs can include a title report, escrow fees and some minor costs such as a flood zone review.

In order to qualify for a loan, applicants will need to verify their income with W-2 statements or income tax returns, a current pay stub and recent bank statements.

While current rates are attractive, lenders say potential borrowers need to be sure they are refinancing for the right reasons. Refinancing to buy a new car effectively means the payoff for the car will take 30 years.

"It has to make sense and the payback be a reasonable amount of time," Semon said.