7 Reasons Why You Can’t Refinance Your Mortgage

November 2, 2011 57 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 their mortgage.

Unfortunately, a lot of existing homeowners are finding that they don’t qualify for a refinance for one reason or another. What may have been a slam dunk a few years ago is now not even close to a sure thing.

Let’s explore some common reasons why you may be denied that precious refinance. And don’t fret, I’ll also offer solutions to get around some of these common roadblocks.

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 address 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 to or below the conforming limit. This could also lower your LTV and land you a lower interest rate!  Just make sure you actually want to stay in the house for the long-haul if you go this route.

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 of money 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.


57 Comments

  1. kathy January 12, 2018 at 10:25 am - Reply

    Some change in DTI to 50% 7/29/17, FannieMae/FreddieMac. Requires high FICO and lots of equity.

  2. Jill Mason-Downey December 9, 2017 at 10:58 am - Reply

    I was told I did not qualify for Harp because I owed less than 50000 on my home.
    Truth? Is there any way around this? I am now taking care of my mom and I could use a break.

    • Colin Robertson December 9, 2017 at 1:03 pm - Reply

      Jill,

      The FHFA identifies HARP eligible loans with “a refinance incentive” or “in the money” as having a remaining balance greater than $50,000; remaining term of 10 years or longer, and a rate at least 1.5% above the current market rate. This seems to go beyond the basic HARP requirements to ensure the refinance actually results in a benefit to the homeowner. But I don’t know if the loan amount absolutely has to be greater than $50k. Problem is lenders generally aren’t interested in loan amounts that small either.

  3. Dawn April 9, 2017 at 9:24 pm - Reply

    Bought 2005, BofA. Mtg sold to Nationstar, after foreclosure attempt. I since retired disability. Trying to refi with Nationstar since Dec. They have just stopped communication. Don’t they have to tell me one way or the other, give me an answer?

    • Colin Robertson April 10, 2017 at 8:13 am - Reply

      Dawn,

      If they’re unwilling to help and you need to refinance, you can try reaching out to a housing counselor in your area to see what options you have, or if you think you’ll qualify for a refinance anywhere, try other banks/lenders instead that are willing to work with you.

  4. Brian February 8, 2017 at 8:08 pm - Reply

    Glad I found the website. My brother and I bought a house together about three years ago. It was USDA with recapture clause. Brother lived there and recently moved so we rented it out. He does not want anything else to do with the home so can I refinance to conventional just in my name without resetting the recapture clock or having to pay the tax.

    Not looking to cash out refinance just refinancing the balance so I can use it as a rental. I would qualify as I have excellent credit and the home will meet the 75% loan to value. Just worried about the recapture portion of the clause.

    Thanks

    • Colin Robertson February 15, 2017 at 2:01 pm - Reply

      Brian,

      Not sure there is a way around recapture if you refinance unless the new lender lets you defer it. I also believe recapture is supposed to happen when you no longer occupy the property.

  5. Gloria December 20, 2016 at 5:59 pm - Reply

    Hi Colin,

    I bought my home for $278,000 in 2007, refi in 2010. I have a fixed 4.625% 40 yr mort. due to a loan mod 2 yrs ago. Have been paying monthly. My credit and income is good. I don’t qualify for HARP. It’s owned by Freddie Mac. Value has gone down to 116K. Still owe 277K. Zestimate at 227K. What options do I have to lower my payment?

    • Colin Robertson December 20, 2016 at 9:00 pm - Reply

      Gloria,

      Not sure you’d do much better than 4.625% these days, especially being underwater still by the sound of it. Additionally, you’ve got a 40-year term, which makes the monthly payment cheaper than a 30-year term. If you cant handle the modified payment maybe the lender/servicer would revisit it?

  6. Dale December 19, 2016 at 4:11 pm - Reply

    I am self employed and trying to refi my mortgage. I have equity and great credit but my DTI is too high (on paper). I cant seem to get anyone interested in working with me.
    What options do I have?

    • Colin Robertson December 20, 2016 at 9:15 am - Reply

      Dale,

      You might need to go the non-QM route where they allow higher DTIs, or search for lenders that offer portfolio loans with higher DTI limits.

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