There’s never been a better time to refinance your mortgage, thanks to interest rates that have plummeted to minimum lows in the recent years. You could definitely take advantage of this opportunity to cash-out on your equity, get lower monthly payments by refinancing into a lower interest rate, or get a shorter loan term and pay off your debt sooner. However, mortgage refinancing application is not frustration-proof.
There are factors that could lead to an application being turned down. Before you initiate your refinancing journey, know and learn from these common reasons why some refinancing applications get rejected:
i) Bad Credit Profile
Your credit score plays a vital role in determining your creditworthiness for getting any loan and getting a refinancing mortgage is not an exception. Lenders will look at your credit history for bankruptcy records, revolving credits, or incidences of credit delinquencies. If you had missed payments within the previous 6-12 months on your mortgage, that would be a red flag to the lender and may cause your application to be denied.
ii) Debt-to-Income Ratio is High
Your debt-to-income ratio reflects the weight of your debt against your monthly payment capacity. It is determined by dividing your total monthly debt with your gross monthly income. In other words, it is the money that goes to paying an outstanding debt. The lower your DTI is, the better for the lender because it means you have a good balance between your earnings and your payments. Having a high DTI tells the lender you may not be able to realistically pay the monthly debt and therefore is more likely to default on the loan.
iii) Appraisal Comes Back Too Low
The conflict between the appraised value and the expected value of the property can be a cause for the lender to turn down a refinancing application. When the appraisal comes back lower than what is being owed on the house, this could result in the borrower having a negative equity – a deal too risky for lenders to walk into.
iv) You Have a Portfolio of Other Properties
Investing in real estate properties is smart but getting the fund to finance them all is tricky business, especially when it comes to refinancing. Mostly, lenders would not tie up a deal where the borrower owes another debt as significant as another property or one that is still undergoing repayment.
v) Income Verification Issues
This concern is directed to small business owners and self-employed individuals who don’t usually find it a breeze to verify their income. Earnings are determinant of one’s debt-to-income ratio so if your income is vaguely represented, the lender may hesitate to approve your application.
vi) Failure to Submit Documents for Underwriting on Time
Being punctual on your documents for underwriting is more important than you think. Failure to submit them on time can result in a denial of an application. In this case, you should be prompt to ask your lender for a complete list of the documents needed for underwriting and forward them before the deadline.
In the event that you get denied for refinancing, talk to your lender to ask the cause for the denial. They will be able to give you a detailed explanation of the reason for rejection. Just as well, they could also give you advice on where you went wrong and how you can improve in this aspect to succeed in refinancing on your next application.
What Do I Do After My Refinancing Application Is Rejected?
Being denied for refinancing is not the end of all. You can still apply to different lenders and get a successful refinancing. It thus pays to have a list of lender options.
If your problem is bad credit, you may have to wait for some time to build a good profile. Read about these five helpful habits to boost your credit score.
If however, for some reason, circumstances could not allow you to wait for a significant amount of time to rebuild good credit, there are refinancing options you can find for not so stellar credit scores.
Successful refinancing takes time and effort. Cracking the code requires patience and ingenuity. If you are well-advised, know where you stand, and have examined your options, then you can rest assured that you are on the right track.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.