If you own a home, you may be considering refinancing your home mortgage. A mortgage refinance is when you take out a new loan to replace your existing mortgage. Homeowners typically refinance to take advantage of lower market interest rates, or to reduce their monthly payment with a longer repayment term. Getting approved for a refinance loan can be a difficult process, and you may be denied the first time. Read on to learn more about reasons why refinance was denied, and how to get approved after a denial.
Types of Refinance Loans
Before you apply for a refinance loan, you should take the time to evaluate your options and decide what works best for your situation and financial goals. There are various types of refinance loans available.
This is sometimes referred to as a “rate-and-term refinance”, because you replace your current mortgage with one with better rates and terms. Your term length, interest rates, and monthly payment will likely all change.
With a cash-out refinance, you still replace your old mortgage with a new one with different terms, but you take out a loan that is larger than what you have left to pay off on the home so that you can receive the surplus in cash. This is a good option if you’ve already built good equity in your home, as most lenders will look for you to have at least 20% equity in your home.
If you don’t have a 20% equity in your home but still want to get a better mortgage rate or lower payments, you can opt for a cash-in refinance. With this type of refinance, you make a large payment towards your principal to lower your loan-to-value (LTV). For example, if your home is valued at $200,000 and you have paid off $20,000, then you have a 10% equity in your home. You can pay another $20,000 all at once to bring your equity up to 20%, and become eligible to refinance.
This type of refinance is good for government-backed mortgages, like FHA loans, VA loans, or USDA loans. These refinances require very little paperwork, and no appraisal, so closing costs are low.
Reasons for a Denied Refinance
A lender may deny a refinance application for many reasons. Here are some of the most common.
Too Much Debt
Lenders will be looking at your debt-to-income ratio (DTI), which compares your income each month to the total monthly payments you make toward your debt. The federal government considers a 43% DTI the upper limit for mortgage approvals. Ideally, your DTI is 36% or lower. If you have a high debt-to-income ratio, lenders may deny your application.
Poor Credit Score
Your credit score demonstrates how likely you are to be able to pay back a loan, so a bad credit score will be a red flag to lenders, making them more likely to reject your refinance application. A credit score below the mid-600s is more likely to get rejected.
Believe it or not, a reason many people’s refinance applications are denied is because they failed to fill out all the paperwork properly. There are typically many documents you need to prepare when applying for a refinance loan, such as your W-2s, tax returns, and pay stubs. All steps of the process must be followed diligently.
Home Has Dropped in Value
A lender wants to be sure the property is worth as much as the purchase price, which is the price they’re lending on. If your home has decreased in value since you purchased it, your application may be rejected.
Not Enough Cash
Just like you do with a regular mortgage, you are going to face fees and closing costs that you will need cash on hand to pay. Sometimes, a lender will be willing to roll those fees and costs into your loan, but it’s not unlikely to have your application denied for this reason.
Lenders will investigate your income before approving a refinance loan. First off, if they believe your income is too low for you to handle the payments, they will reject your application. Beyond that, lenders look for consistent employment- ideally you have been at your current position for two years or more.
For those that are self-employed or own a small business, it may be difficult to prove income through pay stubs, which adds to the challenge of having income verified.
You Own a Portfolio of Properties
If you are a real estate investor, you may already have a portfolio of properties that you own. Owning properties can be great for creating several streams of income, but it means even more disaster if you have money issues. Lenders are very aware of the inherent risk involved and may be less likely to accept your application because of it.
If you’ve been rejected for a refinance, you still have options.”
How to Get Approved After a Denial
If you’ve been rejected for a refinance, you still have options and can take steps to improve your standing so you are more likely to get accepted the next time around. The law requires lenders to provide a written explanation for the rejection of the application, so you can have an idea of what needs to be fixed before you apply again. Here are some general steps you can take.
Check Credit Report for Errors
There’s a small chance that inaccurate information was pulled when your credit report was generated. If your refinance application is denied, take a deeper look at your credit report and make sure all the information is correct. If something is incorrect, you can dispute it. The bureau will then investigate the matter and make necessary corrections to the report.
Improve Your Credit Score
If your poor credit history is the thing keeping you from getting approved for a refinance loan, you should take time to improve it before you even attempt to apply for another loan. Payment history makes up 35% of your credit score, start by making sure your monthly mortgage payment and bills are paid on time. Only apply for loans that you really need and try to keep the balances on your credit cards low.
Pay Off Debt
When you pay down debt, you will lower your debt-to-income ratio (DTI), making it more attractive to lenders. Thus, you should work to pay off some of your debts completely. Also, avoid taking on any new debt.
Examine Your Loan-to-Value Ratio
Your Loan-to-Value (LTV) ratio is the percentage of loans you’ve taken out on your home in comparison to its current value. Lenders look for an LTV of 80% or lower, so if yours is higher than that, you should consider waiting until you’ve paid off more of your current loan--or apply for a lower loan amount.
Ready to Get Approved?
Getting approved for a refinance can be a long, difficult process, especially if you don’t know what to expect going into it. If you are preparing to refinance your home, be sure you understand your options and all the steps involved. If you’ve already applied and been denied, don’t worry—there are a number of ways to improve your standing and get approved for another loan. Talk to Amplify’s real estate team today and find out more about refinancing your home.