7 Reasons Why You Can’t Refinance Your Mortgage

November 2, 2011 7 Comments »
7 Reasons Why You Can’t Refinance Your Mortgage

With mortgage rates so low, just about everyone and their mother has at least inquired about refinancing.

Unfortunately, a lot of current homeowners are finding that they don’t qualify for one reason or another.

That said, let’s explore some common reasons why you may be denied that precious refinance. And don’t fret, I’ll also offer solutions.

Lack of Equity/ LTV Restraints

Perhaps the most common reason for denial nowadays is a lack home equity, which translates to a loan-to-value ratio well above what’s acceptable.

For example, a great number of homeowners took out interest-only home loans and option-arms during the housing boom because home prices were only going in one direction. Up.

But once things took a turn for the worse, many of those homeowners had little, no, or even negative equity as a result.

Even those who opted for traditional fixed-rate mortgages may have sapped their home equity by cash-out refinancing repeatedly. Regardless, many of these homeowners will find that they don’t qualify for a traditional refinance thanks to their inflated LTV.

Solution: There are a few government-backed programs, as well as lender-based programs out there at the moment that deal with high LTVs. The most popular is HARP, and soon HARP 2.0 will be released, which has no LTV ceiling. Inquire with your loan servicer or any other lender/broker for details.

Loan Amount Too Big

What if your loan amount falls into the jumbo realm, and you don’t have the special qualities, such as an excellent credit score and a low LTV to qualify? This could make it difficult to get that low rate, let alone a refinance to begin with.

Jumbo loans are a lot more restrictive and come with higher interest rates than their conforming loan brethren. So expect more scrutiny if your loan amount is bigger than most.

Solution: Make it a cash-in refinance by bringing money in at closing to get the loan amount down below the conforming limit. This could also lower your LTV and land you with a lower interest rate!  Just make sure you actually want to stay in the house for the long-haul.

Credit Score Too Low

Another common refinance roadblock is a less-than-perfect credit score. And by less-than-perfect, I mean crappy. If your credit score isn’t where it should be, there’s a good chance you won’t get approved for your refinance.

Credit scores below 620 are typically considered “subprime,” and will make qualification difficult, especially at high LTVs. Basically the combination of a low credit score and high LTV is a huge risk for a mortgage lender to take, especially in today’s market.

Solution: There are still options for those with low credit scores, such as FHA loans. You just need to shop around more to find them or enlist a mortgage broker to do the legwork for you. Either way, understand that the mortgage rate you see advertised on TV won’t be the one you receive. So you may want to work on ways to actually improve your credit score before you apply.

Insufficient Income

Another refinance killer is insufficient income. If your income isn’t as high as you said it was when you first got your mortgage during the boom (stated income loan), you may be in for a surprise this time around.

And supplying your actual income to the mortgage underwriter could be a rude awakening, even with the low mortgage rates on offer. If you aren’t able to squeeze below the maximum debt-to-income ratio limit, you’ll be denied.

Solution: While making more money is likely out of the question, adding a co-borrower could help you qualify. Or paying off existing debt. You can also shop around to find a lender with more forgiving limits.

Spotty Job History

This is a biggie, considering how bad the unemployment picture has become in recent years.

If you can’t prove that you’ve been steadily employed, typically for the past two years in a row, the underwriter may deny your refinance application, even if you make plenty and have loads of assets in the bank.

Solution: If you lost your job and resumed working, an underwriter may consider your application if you can document that your income is stable, predictable, and likely to continue. You can also consider a co-borrower for help qualifying.

Absence of Assets

Another toughie is asset documentation, especially with that nagging unemployment situation mentioned above.

If you don’t have sufficient, seasoned asset reserves to show the underwriter you’ll actually be able to make your monthly mortgage payments, you may be denied that refinance.

So it’s very important to put money away early and often into a verifiable account. Your mattress isn’t verifiable…checking and savings accounts, stocks, bonds, retirement accounts, etc. are.

Solution: Even if you don’t have the necessary assets, asking a friend or family member for a short-term loan could work. Just move the money into your own account several months before applying for the refinance to avoid getting the third degree from your lender. Or consider a no cost refinance to reduce out-of-pocket expenses.

You Listed Your Home

If you happened to list your home for sale, then quickly realized no one was interested, you may now be pondering a refinance. Unfortunately, your prospective lender probably won’t be too thrilled about it, considering the fact that you may sell again if given the chance and prepay your new loan.  You may also run into problems when it comes time to appraise the property if it wasn’t selling at your asking price.

Solution: Call around and see which bank or lender doesn’t mind that the home is/was listed.  Then remove the listing before you apply to ensure there aren’t any complications.  And be prepared to write a letter of explanation regarding the “change of heart.”

In closing, these are just a few of the many, many ways you may be denied a refinance. This isn’t 2006. It’s 2011. And times have changed considerably.

Believe it or not, you actually need to qualify for mortgages these days. So do your homework and tie up any loose ends early on to avoid problems during the loan process.

Tip: If you think/know you’ve got a tricky loan application, calling on a mortgage broker may be a good move to help you navigate your way to an approval and a lower rate.

Compare Today’s Mortgage Rates

7 Comments

  1. Canadian Mortgage Inc November 4, 2011 at 6:34 am -

    Refiancing is a great solution for many, especially those whom have built up equity in their home and their interest rate is higher than today’s rate. But yes, to qualify for a refi loan is more difficult than it was just a short few years ago.
    Getting ones financial house in order before contacting a mortgage broker is very important and helps the proccess go quickly and smoothly. Good tips on how to work through some of the more common financial pitfalls when trying to refinance your home.

  2. Passcloud May 21, 2012 at 9:59 pm -

    blood suckers! They want you to refinance to get more money from you. while the money you already paid them for the first mortgage evaporates with the home value. Another bail out in disguise. Mortgage interest is wrong.

  3. Joan Stein August 15, 2012 at 12:15 pm -

    I’m in the middle of refinancing
    Small amount – $130,000 for 10 years

    However, the lender just told me that there is a problem because 43% of property is rental or business

    Now what? Can You advise me

  4. Colin Robertson August 15, 2012 at 12:40 pm -

    Joan,

    Your bank or broker hit an underwriting snag. If you’re working with a single bank, you may want to enlist a mortgage broker to see if a different bank can get around or work with your issue. Or at least see if an “exception” is a possibility. Good luck!

  5. Jenn February 24, 2014 at 8:01 am -

    There is also a seasoning requirement if you just refinanced or purchased your home, sometimes 120 days or longer.

  6. Mary June 19, 2014 at 3:18 pm -

    Fannie Mae purchased my loan when I refinanced in March. Now it’s June and rates dropped another whole point for my desired term. I want to refi again to consolidate debt and pay off faster at the lower rate while increasing my monthly cash flow, but the mortgage broker is saying Fannie Mae won’t let me refi until six months from March. Since it acquired my loan, do I have any recourse for an exception to their little rule? I plan to sell in 2 years, so I’m not keeping the house. I just want to increase my cash flow and pay off high interest debt at a lower rate.

  7. Colin Robertson June 19, 2014 at 5:46 pm -

    Mary,

    Are you sure it’s Fannie Mae’s guidelines and not an issue of the broker being subject to premium recapture fees?

Leave A Response