Loan churning

gustavoc · #1 (**permalink**) 04-05-2010, 01:02 AM

Here's my scenario:
Current home: 3db/2.5 bths Purchased in 2004, refinanced 6 months ago. This was my first and only refinancing. I did NOT take any cash out and lowered my interest rate by a full point.

Last month I found a larger home (4bd/3bths) for sale in a nicer area and decided to make an offer. My offer was accepted and I was pre-approved on a loan by a bank. Escrow is setup, appraisal is ordered, inspection is done, etc. When it went for undersigning, the bank said they could not do my loan because their system had a red flag on loan churning. They actually have a definition of loan churning on their guidelines and it obviously has nothing to do to what I did - a valid 1-time-no-cash-out refinance!

My question is, short of going to this bank is trying to reason with them, do I have any other resource against them? Can I say I am being discriminated because I refinanced ONCE my current house to take advantage of lower rates?

If I need to go to another bank I need to pay another 500-dollar appraisal apparently. Can I ask this bank who denied to pay for, since they didn't catch this restriction before ordering the appraisal?

Have any of you even heard about this restriction? My loan broker had never heard of such a thing.

Thanks!

sapphirecapital · #2 (**permalink**) 04-05-2010, 03:08 AM

first:
Loan Churning is the process of raising cash periodically through successive cash-out refinancing's. It is a scam initiated by mortgage brokers that victimizes wholesale lenders, with the connivance of borrowers.
Not what you did! needs to be addressed with the bank because the denial and reason can reflect on your credit file. Get a lawyer otherwise they will not take you serious.
Talk to another bank.
Yes there are banks who frown on it, mostly the ones who did it before themselves ;-) however if you talk to a smaller bank or credit union you will find them understanding.

gustavoc · #3 (**permalink**) 04-05-2010, 03:32 PM

My loan broker just called me with more info.
My current loan has a clause that I need to live in my current house for 12 months before moving from it. I have a little less than 6 months to complete this time.

She said I should write a letter to my current mortgage explaining my situation, highlighting my growing family/better school district on the new house, and ask them if they allow me to keep the mortgage and move out (transforming it into a rental).

Do you guys think there is any risk in asking my current mortgage to allow us to buy another house keeping the mortgage with them? What advices could you give me to word this letter properly?

My loan broker said that if I have in writing that they don't care if I move from the house but keep the mortgage, it is likely that the nee mortgage bank will grant me the loan.

Another alternative is start over with another bank that doesn't have this restriction. The downside to that is that my current locked-in rate is 5% and with a new bank it would go up to 5.5% these days.

sapphirecapital · #4 (**permalink**) 04-05-2010, 04:53 PM

Careful when you move from self used family home to rental some terms of the mortgage can change, you can talk with them and highlight as a possibility but I would move very careful, on the matter with the 12 month I'm confused, in the beginning you said that you bought it in 2004, and frankly you should get a mortgage below 5%, but moving from family home to rental home the first home mortgage may go up.

gustavoc · #5 (**permalink**) 04-05-2010, 08:06 PM

Thanks for your inputs. Just to clarify:
2004 - purchased house #1 - 5.875% interest on mortgage. Bank "A".
Oct/2009 - refinanced house #1 with bank 'B" - lowered interest to 4.875%. The loan has a 12-month residence restriction.
Apr/2010 - applied for a loan to purchase house #2. Locked-in on a 5% 30-year fixed on bank "C".

Bank "C" denied the loan since the refinanced occurred less than 12 months ago. After some letters, bank "C" agreed to proceed with the loan if provided with a letter from Bank "B", saying they are ok with me turning house #1 into a rental.

Today - wrote the letter to Bank "B" asking for permission to move out of house #1 and turn into a rental.

waiting for their response...

gustavoc · #6 (**permalink**) 04-05-2010, 08:10 PM

And thanks to your suggestion I wrote saying I would like to buy another house and turn my current home into a rental, and I am asking their OK in order to do so.

gustavoc · #7 (**permalink**) 04-07-2010, 02:27 PM

Just FYI, "bank B" agreed and we're moving forward.

sapphirecapital · #8 (**permalink**) 04-07-2010, 02:53 PM

good job, hope the rental pays the mortgage itself.

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