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Avoid These 6 Common Reasons a Refinance Can Be Denied
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If you’re searching for reasons why your refinance was denied, you’re not alone. Lenders deny more than 2.5 million mortgage loan applications each year, according to the Consumer Financial Protection Bureau.
When you refinance, you’re taking out a new loan to pay off and replace your current mortgage. That means you’ll need to qualify all over again, and lenders will want to take a look at your income, credit, debt and property value to verify that you do. If your financial situation has changed since you first bought your home, your refinance may be denied.
Your mortgage refinance was denied; now what?
If your lender denied your mortgage refinance, it’s not the end of the world. Just because one lender denies your application, it doesn’t mean every lender will. Be sure to ask your lender for the specific reason why you were denied. The lender has to tell you which factors led to your denial — and you can ask for all this in writing.
6 common reasons a refinance is denied
If your refinance mortgage application is denied, lenders are required to tell you why. Denial reasons tend to fall into one of a few categories, according to data collected under the Home Mortgage Disclosure Act. Here are the most common:
You have too much debt
The most common reason why refinance loan applications are denied is that the borrower has too much debt. Because lenders have to make a good-faith effort to ensure you can repay your loan, they typically have limits on what’s called your debt-to-income (DTI) ratio. This ratio compares the amount of money you bring in each month to the total monthly payments you make toward your debt.
You have bad credit
Your credit score gauges how likely you are to repay a loan and is usually measured on a scale from 300 to 850. If your score is below the mid-600s, you may have a hard time qualifying for a refinance. To be approved for a conventional mortgage, you typically need a credit score of 620 or higher.
Your credit score can change over time. If you have had some credit mishaps since you took out a mortgage and your score has dropped, there’s a chance you can’t refinance your mortgage.
Even if your score falls in the acceptable range, you may still be denied for credit reasons. For example, a history of late mortgage payments can hurt your chances at a refinance no matter what your score is. If you paid your mortgage late sometime in the past few months but your credit score is still in an acceptable range, it’s not a guarantee you’ll get your refinance.
“You need a clean mortgage payment history to refinance no matter how good your credit score is,” said Adam P. Smith, president of The Colorado Real Estate Finance Group.
Your home has dropped in value
When you take out a mortgage, your lender uses your home as collateral for the loan. This means that if you fail to repay your loan, the lender takes possession of the property.
When you apply for a mortgage refinance, your lender will want to make sure the property is worth as much as the purchase price they’re lending on. If it’s not, your loan may be denied. This can be an issue if your home’s value dropped significantly since you took out your first mortgage. You may find yourself underwater on your mortgage, meaning you owe more than the property is worth. In this case, it can be difficult to be approved for a refinance loan.
Your application was incomplete
A surprisingly common reason refinance applications are denied is because your application was incomplete. If your lender doesn’t have all the information they’ve asked for, they may choose to send you a letter informing you that your application is incomplete, or they may simply deny your refinance.
Pay close attention to the documents and data your lender is asking for when you apply for a refinance loan. This could include pay stubs, W-2 forms, tax returns or other documents to verify your income. Give yourself plenty of time to collect it all.
Your lender can’t verify your information
Lenders will double-check to verify some information in your mortgage application, like your employment history. They may contact your current or former employers to see how long you worked there. If your lender has trouble with this process, your mortgage may be denied.
You don’t have enough cash
When you refinance a home, you often have to bring some cash to the table to pay for fees and closing costs to close the new loan. Sometimes, your lender will be willing to roll these costs into your loan or give you a credit in exchange for charging you a higher interest rate. This isn’t always an option, though, and “insufficient cash” is a fairly common reason lenders deny refinance applications.
How to get approved for a mortgage refi after denial
As you move on from a refinance denial, there are some steps you can take to make it more likely your loan application will gain approval in the future.
Check your credit report for errors
If your refinance was denied due to your credit history, your lender must tell you the numerical score they reviewed and the agency that provided it. You can get a free copy of your credit report from the major reporting agencies. Take a close look at the report and make sure all the information is accurate. If you see something on your credit report that you don’t think is legitimate, you can dispute it. The bureau is then required to investigate the matter and make corrections to the report, if needed.
Common errors on your credit report can include credit cards or loans on your report that aren’t yours, incorrect balances reported on credit lines, incorrect late payments that were actually on time and multiple accounts reported for a single debt. These errors could lower your credit scores enough to make you ineligible for a refinance.
Take steps to improve your credit
If your credit score is keeping you from refinancing, you’ll want to raise it as quickly as you can. Since your payment history makes up 35% of your credit score, the most important thing you can do to improve your credit is to make sure all your mortgage payments and other bills are paid on time. Do what you can to make current any past-due accounts. Try to keep your credit card balances under 30% of their limit, and only apply for loans you absolutely need.
Work on paying off your debt
Paying down debt lowers your DTI ratio and may improve your credit score. Try to pay some of your bills off completely, whether that means eliminating a personal loan or paying off your auto loan. In the meantime, avoid taking on new debt. Remember that additional monthly obligations will skew your debt-to-income ratio and make it harder to refinance your mortgage.
Try a specialized refinance program
If you keep getting denied due to the value of your property, there may be a specialized program that can help.
Fannie Mae’s high loan-to-value refinance option may help you get approved if you’ve been denied for a mortgage loan due to your home’s value. You must be up to date on your mortgage payments and have at least 3% equity in your property. Freddie Mac has a similar program known as Enhanced Relief Refinance.