There are multiple reasons why a homeowner might make the decision to refinance. Perhaps they are trying to reduce their monthly mortgage payment or shorten the term of their current loan. Or maybe they are hoping to do a cash-back refinance in order to either pay off debt or to pay for home improvements. Whatever the reason, it’s important to remember that just because you have a current mortgage, does not mean you’re guaranteed to be approved for refinancing. Here we will take a look at some of the reasons a refinance application might be denied.
- Poor credit score or credit history: Missed payments and negative marks on your credit report are likely to keep a lender from approving your application as they will see you as a risk. Keeping up your credit score, even after purchasing a home, should be kept a priority. Life happens, which sometimes leads to financial stress. Do your best to maintain your credit score or raise your score after you have a bump in the road to keep your financial options open.
- Income is low or not reliable: Lenders want their applicants to have a steady, reliable income. If they find your income too low or unstable, they will likely deny the application.
- Value of home is too low upon appraisal: The appraised value of your home must be greater than what you owe.
- Debt-To-Income (DTI) ratio is too high: The DTI requirements might differ from lender to lender, so be sure to ask your prospective lender about their criteria if you suspect this to be an issue. Lenders will reject applications if they believe the applicant is overextended.
- Mortgage underwater: A mortgage is considered underwater any time a homeowner owes more than the house is worth. This occurrence is less common with the current market; however, this is a reason from an application to be rejected.
- Not enough equity: Typically, lenders require an applicant to have at least 20 percent equity in their home in order to qualify for a refinance.
If you should find yourself in a situation where you have been denied on your refinance application, a notice will be sent to you explaining the reason. In some cases, you might want to try a different lender. If you applied with a lender other than the one you currently have your mortgage with, you might consider speaking with them to see if there is anything they can do. With good payment history, you might find they can assist you or work with you to correct the issue in order to keep your business. If your credit score is the issue, work on increasing your score then apply again in the future. You might find an improved credit score will not only get you an approval but will get you an approval with a lower interest rate.