6 Reasons Your Refinance Was Rejected
Has your refinance application been rejected, and you are now wondering what could have possibly gone wrong? Don’t worry, because as many as 2.5 million home loans are denied every year.
Or maybe you are preparing yourself to apply for a refinance program and want to make sure that you avoid these common mistakes. From having a bad credit history and DTI ratio to unverifiable income and decreased home value, many reasons may cause a refinance to be denied.
Why was my refinance rejected?
Lenders are required to inform borrowers why a refi application is denied. These are some of the most common reasons:
1. Poor credit history
The number one reason for lenders to deny a refinance is poor credit history. The credit scale is between 300 and 850, which is used to keep track of how likely it is for you to pay back a loan. It is generally recommended to have at least 620 in credit score to apply for a conventional mortgage.
Beyond just the approval, your credit score will also affect your refinance rate. Remember that credit score is ever-changing too, which means it can drop between the time of your mortgage application and refinance.
2. Too much debt
Similarly, having too much debt may also hinder your refinancing process. A high debt-to-income ratio will make lenders wary of giving you a loan because it means you are using a lot of your income to make monthly payments toward debts.
Before you even start applying for a refinance program, it may be wise to start paying off as much debt as you can. We recommend keeping a DTI ratio of below 43%, although the ideal percentage would be 36%.
3. Not enough collateral
Just like a conventional mortgage, refinancing a home loan means using your home as collateral. Unfortunately, this means that refinancing can be a problem if your home value has decreased since you first purchased it.
This is because the lenders want to ensure that the property is worth as much as the amount of value that they are lending on. Typically, you’d need at least 20% of equity to qualify for a mortgage refinance.
4. Incomplete application
A less dramatic yet equally common cause for refinancing rejection is incomplete application. Let’s say you haven’t provided enough or the right information that you need to. While some lenders will tell you that the paperwork is incomplete, some will simply reject your application.
With that said, be extra careful and attentive when it comes to gathering documents needed for a home refinance. Or any other loan, for that matter. This may include your payslips, W-2 forms, and tax returns.
5. Not enough cash
Most of the time when refinancing a mortgage, you need some cash to pay for closing costs. It may be possible to press down these initial fees for a higher interest rate, but not always. A lot of lenders also deny applications due to “insufficient cash”.
6. Unverifiable income information
While it may sound like income is something that should be very easy to verify, it may not be so straightforward for certain people. This includes self-employed individuals or those with a business.
Sometimes, lenders may also contact your employers to check how long you have been working there. They may reject your application if this process proves to be difficult.
What to do next if your refinance was rejected
It can be disheartening if your application for a refinance has been denied. But there’s no need to stress out because there are some things you can do to ensure approval on your next try.
• Talk to your lender
The first thing you should do after being denied a refinance is talking to your lender. They are required by law to state the reason why an application is turned down, especially if it has to do with credit. You’ll receive a letter detailing this, which can be useful in helping you understand what exactly went wrong.
Of course, if you believe that the information given is inaccurate or vague, don’t hesitate to contact your lender and talk to them. Chances are they will be happy to assist you as they do want a business with you.
• Check for errors
You’re entitled to receive a copy of your credit report, so why not take a second look and check for any error. If you notice something inaccurate, take this to the credit bureau, which will make the necessary corrections.
Some of the most common mistakes on a credit report are incorrect information, balances, late payments, and duplicated negatives. All of these could significantly lower your credit score, which is essential when refinancing.
• Improve credit score
There is a high possibility that your refinance was denied due to a low credit score. In this case, you should focus on boosting your history so that it is much higher for the next time you apply. 35% of your credit history is determined by your payments, which means it’s important to make payments on time.
In addition, we recommend keeping your credit card balance at least 30% less than the limit. And only apply for any loan when it is needed.
• Pay off outstanding debt
On the note of improving your credit score, the best thing you can do about this is to pay off any debt you have. Even if you can’t pay the entire debt off, it can be worth it to pay a portion of the amount and have an agreement with your creditors. This will be indicated in your credit report that the debt has been “paid as agreed”. Meanwhile, try not to take on new debt!
• Consider specialized refinancing options
If this is not your first time getting denied for a refinance, especially if it is because of your home value, it’s time to consider applying for a specialized program. There may be options that can help you out, such as Fannie Mae’s high loan-to-value refinance and Freddie Mac’s Enhanced Relief Refinance.
All in all, it’s important to understand the reasons behind why some refinance applications may be rejected so that you can avoid them.