From a borrower’s perspective, it may seem that the process for financing a purchase vs a refinance shouldn’t be all that different.
In reality, there are some significant differences that can potentially lead to different financing outcomes.
As a broker, when you’re submitting a deal to an MIC or private lender, it’s important to remember and to inform your borrowers that the lender’s underwriting for purchases may be different than for refinances. The reason for this is the lender must apply their experience from previous files in order to minimize risk. And at first this may seem confusing, especially if your borrower is new to refinancing.
So, let’s break it down:
The first difference in financing a purchase vs a refinance is going to be LTV. The LTV is a function of confidence in the value of the property. In a purchase situation, the purchase price is the best indicator of the value of that property. That being said, a lender may be willing to give a higher LTV, as the price is indicative of current market values.
In a refinance, however, the lender is relying on an appraisal. The appraisal is the best estimate of the fair market value. As this in only an opinion of value, lenders may be more conservative in their LTV on a refinance.
The next major difference lies in the history. A lender’s history may indicate more defaults in previous files with refinances than with purchases. While this may not necessarily be the case with your borrowers, lenders will make decisions based on their own history and past clients. If this is the case, they may be forced to be more conservative in their underwriting.
Informing your borrower from the beginning of the differences between a purchase and a refinance will help clear any confusion. Knowing the differences and the reasoning behind them can also help to manage expectations. And as always, if you have any questions, call the expert underwriters at Kokanee Mortgage for help.