You may have heard about the many reasons to refinance, but what are the good and bad reasons? First, refinancing can help you get better terms. If you have less than 20% equity in your home, you may need to pay private mortgage insurance. Finally, refinancing can eliminate your PMI payments.
You may want to refinance because interest rates are low, and you’d like to make payments on your mortgage faster. If you agree on adjustable-rate, refinancing allows you to take out more debt in the future.
The list of refinansieringslån benefits doesn’t end there. You can also get some extra cash for home improvement, buying a car, or going on a fancy vacation. Or you can simply put that surplus money in your savings account. But there are several reasons a refinance application might be turned down. You may have bad credit, are deeply in debt, or your income is difficult to verify.
Understanding why your application could be rejected can help you prepare for a successful refinance. If you haven’t figured out why you’ve been turned down, get an explanation from the lender. By knowing that, you’ll know which steps to can toward improving your chances of getting approved for a refinance.
You Have Bad Credit
Refinancing might be impossible if you have negative marks on your credit report. Generally, low credit scores make it difficult to get a mortgage. That’s particularly true at high LTVs, where lenders are taking a risk. A bad credit rating will prevent you from getting the lowest rates available. So before applying or accepting any refinance offer, try to fix the problems on your report.
Another reason a refinance application may be rejected is that the borrower has a low debt-to-income ratio. Your debt-to-income ratio must be within a certain threshold. For example, lenders commonly require a debt-to-income ratio of 40 percent.
Mortgage rates are rising, but they are still low compared to historical standards. If you are turned down for a refinance, address the problem with your current lender and apply later. Getting another ‘no’ shouldn’t make you give up hope. Instead, look for another lender while keeping up with payments on your current mortgage. That’s the best way to improve your credit score.
How to Improve Credit Score
Here’s what you can do to improve your credit score. First, make sure to pay off your credit card balances on time. Paying off your credit card debt can improve your debt-to-income ratio and credit score. Next, avoid late payments as they can hurt your chances. Finally, paying your initial mortgage on time won’t disqualify you.
If your lender cites your credit score as an issue, check whether its information is accurate and updated. Get a copy of your credit report from three credit bureaus and check all items. If you spot any mistakes, report them right away. The credit bureaus will investigate your dispute and make necessary corrections.
Not making enough money to meet your monthly mortgage payments is another common reason for refinancing to be denied. And if you can’t lower your debts, you can increase your earnings. Of course, that will lower your DTI, reflecting on your credit score, too. To improve your chances, find another source of income, pick up extra shifts, or get a side gig.
You’re in Debt Already
You may have heard that poor credit history can prevent a refinance loan approval. Lenders look at a borrower’s payment history, and your application may be denied if you don’t pay your bills on time. Likewise, if you have difficulties handling debts, that will be a red flag to lenders.
Make sure to only apply for loans you can pay back on time and keep your credit card balances low. Paying down your debt will also lower your debt-to-income ratio (DTI), which lenders find more appealing. Likewise, avoid taking on new debt or making large purchases, especially if you already have difficulties with current payments.
Income Is Hard to Verify
Bringing incorrect proof of income is a common mistake. Whether it is a W-2 from a previous year or a pay stub with outdated information, presenting the wrong income proof will lead to rejection. Yet, income verification is not a complicated process, especially if you have a steady job.
There are several ways to demonstrate your income when applying for a refinance loan. First, an official document that is issued by your employer is your paycheck or pay stub. This letter will state your employment dates, the hourly rate, compensation plan, and your current salary. Having these documents on hand will significantly assist the lender in determining your creditworthiness.
In addition to your salary, you may have received a gift or inheritance. Get a copy of a will, rental agreement, or any contract proving your additional income. You can use this extra money as a down payment. Alternatively, if you are self-employed, you can also provide proof of your income through a bank statement.
Lack of Home Equity
There are many reasons a refinance application may be declined. Sometimes, borrowers tend to take another loan on their home or any other asset equity. So the refinance application can simply be rejected due to a lack of home equity. That translates to a loan-to-value ratio that is higher than the lender’s maximum allowable limit.
For example, during the housing bubble, many homeowners took out interest-only loans or option arms. When the bubble ‘popped,’ as expected, it left them with negative equity and a higher interest rate than they could have paid on their initial loans.
If you have sufficient assets, you should keep them in a verifiable account, not a mattress. Checking and savings accounts are verifiable accounts, as are retirement accounts and stocks. In the worst case, you can use them for refinancing upon equity or as collateral.
One of the most common reasons for a refinance denial is that the applicant failed to submit all required documentation. Some lenders require a pile of papers, and it’s easy to miss some of them when in hurry.
The lender will notify the applicant of an incomplete application and may deny the refinance. As such, you must pay attention to any documents the lender requires. This may include W-2 forms, tax returns, and pay stubs. Incomplete applications may also have inaccurate or outdated information on them.
Frequently, an applicant will fill out an application and forget to fill out certain sections. That can happen in rush. Incomplete applications are complex and often contain wrong or missing information. You may not enter it on purpose, but you made a mistake that can cost you loan approval. The lender will see that information in your form doesn’t match provided documents.
Incomplete applications may also have other reasons. Although a lender can’t always deny a refinance based on an incomplete application, they are still allowed to evaluate your application and notify you of its decision. Nonetheless, the denial of credit must have specific reasons. For example, the creditor can’t simply state ‘incomplete application’ as the reason for denying. But not providing all the required information may be a sound and justified reason for loan denial.
Certain Life Events
A high unemployment rate caused a smaller number of refinancing approvals. If you’ve lost your job recently and still haven’t found a new one, it can affect your ability to qualify for a refinance. Also, if you are unemployed, you may be turned down if your credit score is low enough.
Recent diseases, injuries, or other life events could be the reason why lenders don’t find you a good applicant for refinancing. But that can be only at the precise moment. Once you regroup and get back to work, you can apply again. Just make sure to do that at least a month after the previous application. That way, you’ll avoid hard inquiries about your credit report.
Lenders can turn down your refinancing application if they spot your property on sale. But suppose there are no interested buyers on the open market. In that case, banks won’t be quite willing to approve a new loan upon your home equity. A lack of buyers can drastically affect your home’s value, which most lenders consider a bad sign. So once you de-list your property, wait for a while before a new loan application.
What after Refinance Rejection
You’ve been rejected for a refinance, but that doesn’t mean the end of the world. If one lender says no, that doesn’t mean that the others think the same way. You can try asking the lender why they denied your refinancing request. They are required to give specific reasons for rejecting your application, and you can request that they do so in writing.
Many homeowners refinance their mortgages for many reasons, including lower interest rates and lower monthly payments. You might also want to use the money you save to make home improvements or cash out some of your home’s equity.
Refinance lenders will also double-check your employment history, including contacting your current or former employers. So prepare your employer for that. Also, refinancing requires cash for fees and closing costs. Lenders may offer to roll these costs into the loan or refuse to do so. And if they refuse to roll closing costs into the loan, you may have to pay a higher interest rate.
Whatever the reason, refinancing can be beneficial. However, getting an application denial may seem daunting. But if you follow the steps outlined above, you can be approved in no time and even save thousands of dollars in interest.