Top Reasons Your Mortgage Refinance Was Denied
Consumers usually refinance their homes because it helps them save money or achieve a financial goal. If someone’s credit score has improved dramatically since they bought their home, refinancing could mean securing a lower interest rate and a lower monthly payment. If a consumer initially took out an adjustable rate mortgage, they could refinance to a new home loan with a fixed term. Some homeowners even complete a cash-out refinance to take advantage of the equity in their properties.
Unfortunately, being able to refinance your mortgage isn’t guaranteed just because you own your home. Refinancing requires you to apply for a home loan again, so any negative changes to your financial situation could work against you.
Under the right circumstances, your quest to refinance your home could be even flat-out denied. In that case, you would have no choice but to stick with the home loan you have — at least for a while.
In this post, we’ll talk about some logical reasons why your mortgage refinance application might be denied.
- Reasons for mortgage refinance denial
- Your refinance was denied, now what?
- When should you reapply for a refinance?
Reasons for mortgage refinance denial
A recent study from LendingTree broke down the reasons for mortgage denials — both among people purchasing a home and people looking to refinance — which include:
- Credit history, including credit score: 26%
- Debt-to-income ratio: 26%
- Collateral: 17%
- Incomplete applications: 14%
- Other: 10%
As you can see, most mortgage denials boil down to two factors — a person’s credit history and how much debt they have. Adam P. Smith, president of The Colorado Real Estate Finance Group, said these factors are important because lenders use fairly strict criteria to qualify consumers for a mortgage.
Your credit is poor
To secure a conventional mortgage, you typically need a credit score of 620 or higher. Maybe your credit score was above this range when you qualified for a mortgage initially, but the fluid nature of credit means your credit score can easily change. If you have had some credit mishaps since you took out a mortgage and your score has dropped as a result, there’s a good chance you can’t refinance your mortgage — at least right now.
Smith said that, even if your score is in good shape, it’s still possible negative information on your credit report can ruin your chances at a refinance.
“You might have a credit score of 700, but maybe you filed for bankruptcy last year,” said Smith. “A good credit score won’t make up for that fact.”
You have a history of late mortgage payments
A history of mortgage payments can also hurt your chances at a refinance, and that’s true regardless of your score. Let’s say you were late in paying your mortgage payment last month but your score is still in an acceptable range. In this case, your late payment could hurt your chances at qualifying for a refinance regardless of where your credit score falls.
“You need a clean mortgage payment history to refinance no matter how good your credit score is,” said Smith. This means that any derogatory marks or late payments will work against you.
You have too much debt relative to your income
The amount of debt you have can also be a deal breaker, said Smith. Most lenders will only extend a qualified mortgage to consumers with a debt-to-income ratio of 43 percent or less. What this means is, their debts (including housing payments) make up 43 percent or less of their gross pay.
Smith noted that your liabilities come through on your credit report, and lenders may not like what they see. Maybe you have huge car loans that don’t make sense with your income. In that case, you may not have enough room in your debt-to-income ratio to afford a new mortgage.
Your home’s value has decreased
Generally speaking, you will need to have your home appraised to verify its market value before you are able to refinance. If your home value has dropped since you purchased your property, you may owe more than it is worth. In that case, refinancing could be off the table unless you take advantage of specific government programs that can make refinancing an underwater mortgage possible.
Your refinance was denied, now what?
The Federal Trade Commission (FTC) states that lenders are required to give you specific reasons why your mortgage application couldn’t be approved. Typically, they have 30 days to notify you of your approval or denial in writing, including any reasons for the denial. They may also tell you that you have the right to ask for a deeper explanation within 60 days.
Knowing the reason your mortgage finance was denied can help you decide what to do next, said Smith. Depending on your situation, here are some steps you can consider taking next:
If your mortgage is underwater, consider special government programs that could help.
There are several government programs available to consumers who owe more than their homes are worth. These programs can help you refinance when your loan-to-value ratio is too high to qualify for a refinance otherwise:
- HARP: The HARP Refinance Program is a government-backed refinancing program created for borrowers who owe more than their home is worth. The HARP program has less stringent lending standards than other mortgages, so you’re more likely to be approved. This program will cease to exist at the end of 2018, however, so there’s not much time left to take advantage.
- High Loan-to-Value Refinance Option: This program is available to borrowers who already have a Fannie Mae mortgage. To qualify, the loan-to-value ratio for the new mortgage must exceed 97.01% for a one-unit principal residence. However, LTV requirements vary for limited cash-out refinances, second homes, investment properties and multi-unit properties.
- Enhanced Relief Refinance: This program will become available for homeowners with an existing first lien, conventional Freddie Mac mortgage in late 2018. To qualify, the LTV on the new mortgage must exceed 95.01% for a one-unit primary residence. Your mortgage must be at least 15 months old to qualify, and you cannot be more than 30 days late within the last six months. You also cannot have more than one 30-day delinquency within the last 12 months. All occupancy types are eligible.
Take steps to improve your credit.
If your credit history or your credit score is making it impossible to refinance, Smith said you’ll want to take steps to improve your credit right away. Since your payment history makes up 35 percent of your FICO score, the most important thing you can do is to make sure all your mortgage payments and other bills are paid on time.
Smith also noted that paying down debt can improve your credit score. This is due to the fact that your credit utilization — how much you borrow against your credit limits — makes up 30 percent of your FICO score.
Generally speaking, you should strive to keep your credit utilization below 10 percent across the board. This means that, if you have credit limits that add up to $10,000, you should try to keep your credit card balances below $1,000.
Work on lowering your debt-to-income ratio.
You will also want to keep your debt-to-income ratio low or work to lower it, said Smith. If your bills make up more than 43 percent of your gross income each month, it’s possible you have too many financial liabilities.
To improve your debt-to-income ratio, you should try to pay some of your bills off completely, whether that means eliminating a personal loan or paying off your auto loan for good. Of course, this also means refraining from taking on new debts as well. Remember that additional monthly obligations will skew your debt-to-income ratio and make it harder to refinance your mortgage in the future.
Dispute incorrect information on your credit report.
If your refinance was denied due to your credit score, you should look for ways to repair your credit, said Smith. If your credit score is in really bad shape, you may even want to look into setting up a credit repair strategy with a not-for-profit credit repair company.
Smith also suggested getting a copy of your credit report so you can check for errors. Fortunately, this is fairly easy to do thanks to an agreement the federal government has made with the website AnnualCreditReport.com. This site lets you get a free copy of your credit report from the three credit reporting agencies — Experian, Equifax and TransUnion — once per year.
Common errors on your credit report can include credit cards or loans on your report that aren’t even yours, incorrect balances reported on credit lines, incorrect late payments that were actually on time and multiple accounts reported for a single debt.
If you find an error on your credit report, you will want to dispute that error with the credit bureau reporting that data as well as the creditor. Filing a dispute is free and the credit bureaus are required to investigate your claim and resolve it within 30 to 45 days. If the information is truly incorrect, all parties are required to correct or delete it within that time frame.
When should you reapply for a refinance?
Even if your first application for a refinance is denied, Smith said you can be approved in the future. To increase your chances, however, you need to take action and rectify the situation that caused your denial in the first place.
Generally speaking, you should wait 90 to 120 days to reapply for a mortgage provided you have improved your financial state, according to Smith. However, this is really just a rule of thumb since there is no exact time frame to wait to reapply if your mortgage refinance is denied.
If your credit needed work but you made moves that could boost your credit score, for example, three to four months could be enough time to see a positive change on your credit report. To stay abreast of changes to your credit score, you should sign up for a My LendingTree which lets you receive an estimate of your credit score for free.
Still, it’s possible your efforts won’t be enough. If your debt-to-income ratio is well over 43 percent and you haven’t paid off any of your debts, waiting a few months to reapply for a mortgage isn’t going to help. To qualify, you will either need to reduce your bills enough to get your debt-to-income ratio below 43 percent or boost your income so that your bills make up a smaller percentage of your gross pay. There is no way around it.
Regardless of what you decide to do after your mortgage application is denied, Smith said there is no downside to taking steps to improve your credit. Since loans with the best interest rates and terms go to those with “very good” or “excellent” credit, working toward that goal can only help you in the future.
Being denied a refinance may be a blow to your ego, but the consequences don’t have to be long-lasting. If you are able to transform your financial situation, it’s possible you could qualify for a refinance down the line.
The best course of action to take now is figuring out why you were denied so you can take steps to fix the problem. Since most mortgage denials are the result of credit problems or too much debt, this is likely where you will want to start.
We already mentioned how there is no downside to improving your credit score, so this is an area you will want to work on regardless. Paying off debt is another financial move that always works in your favor, so you should strive to reduce your monthly financial obligations if you can.
The less debt you have and the more bills you pay off, the lower your debt-to-income ratio will be. A lower debt-to-income ratio increases your chances of qualifying to refinance your mortgage while making it easier to save for future goals.