Many homeowners refinance their mortgage to lower their payment, lock in a fixed rate, shorten or lengthen their payback term or cash out equity. But not everyone can qualify. If you're in that group, there could be several reasons your mortgage refinance was denied.
Lenders usually require an appraisal to determine whether your home's market value justifies the amount you want to borrow. If the appraisal is "too low," your home isn't worth enough for the lender to approve that amount. You don't need 20 percent equity to refinance. Indeed, some loan programs don't require any equity at all. How much you'll need depends in part on the type of loan you want and whether you're willing to pay for mortgage insurance. If your equity is "too low" for you to refinance, one solution is to cash in, paying off part of your existing loan to lower your loan amount to better reflect your home's value.
Lenders typically review your credit history and credit score to determine whether you're likely to repay your loan if they approve it. A perfect record of making your mortgage payments on time will help, but doesn't ensure, in and of itself, that you'll be able to refinance. Instead, the lender will examine your overall pattern and practice of using credit, including your car loans, credit cards, student loans and other types of debt. If your credit score is too low for you to refinance, you may need to pay off some of your debt, improve your record of paying on time or take other steps to raise your score.
Lenders aren't concerned with how much you earn or how much you owe. But they are concerned with whether your income is steady and reliable and whether you earn enough to manage your debt. To measure your capacity, the lender will calculate your debt-to-income ratio, or DTI, which compares your income to your debt obligations. If your DTI is too high, you'll need to show a steady history of higher income or reduce your debt to be approved to refinance.
You typically must pass all three tests—appraisal, credit and DTI—to refinance. There could also be other reasons your mortgage refinance was denied.
In fact, the reason might not be entirely about you or your home.
Sometimes, lenders tighten their guidelines to the point where it is difficult for even creditworthy borrowers to qualify. In 2014, Ben Bernanke, a former Federal Reserve official, mentioned at a financial conference that even he had had trouble refinancing his mortgage.
Since then, loan guidelines generally have been loosened, making it easier to qualify.
Your lender is legally required to explain the reasons your mortgage refinance was denied to you in writing. If the disclosure is vague or you don't understand it, ask your lender for more information so you can try to resolve the problem or try again with another lender.
Virtually all lenders use credit, capacity and collateral to make loan decisions, but there are nuances and variations in their guidelines. If one says no, there's a chance another might say yes.