PreForeclosure Marketing:  What to do When the Homeowner Wants to Refinance

Many times when marketing to PreForeclosures, we often hear from the homeowner who wants to refinance to stop the foreclosure.  While this can often be a solution to stop foreclosure, it isn’t always the best one.  Here are some things to ask the homeowner to consider when they mention refinancing to you.

When a homeowner falls behind on mortgage payments, it lowers their credit score.  Once their credit score is below a certain threshold, they become what is considered to be a subprime borrower.  This means that they won’t qualify for the loans and programs that borrowers with excellent credit scores have.  They usually pay for this by having a higher interest rates (and therefore a higher payment), lower LTV (Loan To Value) guidelines (meaning that they can borrow less money), a harsh prepayment penalty, or a combination of all three.

If the homeowner understands that they’re now a subprime borrower, then there is some more research that needs to be done.

First you need to find out from the homeowner why they fell behind on payments in the first place.  If it was due to job loss, are they back working again?  Without verifiable employment, it’s going to be next to impossible for them to get a loan.  Refinancing is really only an option for someone who is employed full time.

             

  

Credit is another consideration for the homeowner.  If they’re already behind on their mortgage payment, chances are that their credit score is lower than when they originally took out the loan.  If this is the case, then it’s much harder for the homeowner to qualify for a refinance.  If they are lucky to qualify, chances are that their new payment is going to be higher than the old payment.

We often ask these homeowners “If you couldn’t make the old payment, why are you confident that you can make the newer, larger payment?”  Sometimes a short-term job loss or a medical bill is the reason, and they can handle the newer, larger payment.  However, more often than not, a series of life changing circumstances have put them in a position where they can’t afford their existing mortgage payment, let alone the newly proposed (increased) refinance payment.

LTV (Loan to Value) is another huge criteria to qualifying for a refinance.  Let’s say that the homeowners’ house is worth $100,000.  Once they fall behind a few payments, or worse yet, are put into foreclosure status, the best LTV they will qualify for is usually 70%.  That means that the largest loan they can get on a refinance of that $100,000 home is $70,000.

Most homeowners don’t have that much equity in their home, making it difficult for them to refinance once they’re behind a few payments.

However, if you do find a homeowner who has full time employment, is okay with the increased payment and has enough equity to be below an LTV of 70%, you have a candidate who can qualify for a refinance.

Partnering up with a mortgage broker who can help such borrowers is going to be a key to your investing business.  If you pass them leads, they should be able to repay you for sending them business.

In many states, however, it is illegal for mortgage brokers to pay you a commission for sending them clients.  I suggest that you make sure what is and is not legal in your state, and follow the law to the fullest.  The last thing you want to do is get in trouble with your state for illegally collecting commissions.

One way that the mortgage broker can repay is to send you leads back.  In other words, they will have plenty of clients coming to them trying to refinance to stop foreclosure.  Many times these homeowners won’t qualify: you want to be in a position to get those referrals from your lender, so you can talk to the homeowner about other options.

Remember that once a homeowner falls behind on their mortgage, it’s difficult for them to get refinanced.  If they are lucky enough to qualify, the payment is almost always going to be higher.  You should partner with a good, reliable, honest mortgage broker and develop a nice lead exchange program to better each other’s business and to be able to help homeowners.