With mortgage rates so low, just about everyone and their mother has at least inquired about refinancing their mortgage lately, whether it’s to obtain a lower interest rate and/or tap into their newfound equity.
There are actually many reasons to refinance a mortgage, some you may have never considered, so it’s important to ensure you’re always eligible if the need comes up.
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 mortgage refinance. And don’t fret, I’ll also offer solutions to get around some of these common roadblocks.
Lack of Equity/ LTV Restraints
- It can be difficult to refinance if you lack home equity due to a low down payment and/or falling home prices
- Lenders typically want your LTV to be below 100% to ensure you’ve got skin in the game
- However, there are some loan programs that address high-LTV and underwater mortgages
- Including streamline refinances that don’t require a home appraisal
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.
Regardless of how, many of these homeowners found that they didn’t qualify for a traditional refinance thanks to their inflated LTV.
Today’s borrowers are more equity-rich thanks to rapidly rising home prices, but those who put little down can still face LTV issues.
And if you want cash out with your refinance, expect an even lower max LTV, such as 80% or lower if a multi-unit property.
Solution: There are several government-backed programs, as well as lender-based programs out there at the moment that address high LTVs, at least with regard to rate and term refis.
The most popular are streamline refinances from the FHA and VA, which do not have an LTV ceiling, along with the newer High-LTV refinances from Fannie Mae an Freddie Mac.
Inquire with your loan servicer or any other lender/broker for details.
Loan Amount Too Big
- If your loan amount is too large you might have trouble obtaining home loan financing
- This is especially true if it’s a jumbo loan and your credit score isn’t great
- Fortunately lenders are beginning to ease guidelines and bump up max LTVs again
- Be sure to shop more if your loan scenario doesn’t meet the guidelines of the government agencies or Fannie/Freddie
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 you saw advertised, let alone a refinance to begin with.
So expect a lower maximum LTV, and perhaps max DTI ratio, along with more scrutiny if your loan amount exceeds your county’s limits.
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. Or consider a piggyback second mortgage.
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 Scores Too Low
- You can still get denied even if you have plenty of equity and assets
- A low credit score alone is enough to sink your refinance application
- Make sure all 3 of your scores are in great shape well before you apply for a refinance
- Aside from boosting your chances of approval, a higher credit score also tends to equate to a lower mortgage rate
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, and even if approved, you won’t get access to the lowest rates available.
If you’re refinancing to get a lower rate, it might not make sense unless your credit scores are high enough to qualify for the best rates available.
Either way, understand that the mortgage rate you see advertised on TV likely won’t be the one you receive. So you may want to work on ways to improve your credit score before you apply.
- A solid income is a necessity when it comes to getting approved for a refinance
- If you get paid seasonally or experienced a big drop in earnings it could be a problem
- Ultimately your DTI ratio must be below certain key levels to get approved
- And your income needs to be documented and expected to continue
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 likely be denied unless you have compensating factors like excellent credit and/or sizable liquid assets.
Solution: While making more money is likely a bridge too far, adding a co-borrower or boarder income could help you qualify. As can paying off existing debt. Also shop around to find a lender with more forgiving limits.
Spotty Job History
- Lenders typically want two years of steady employment
- And it should be in the same position or at least the same line of work
- Make sure you aren’t job hopping too much prior to a refinance to avoid any issues
- Or if you are thinking of a new career, pump the brakes until your mortgage needs are met
This is a biggie, considering how bad the unemployment picture has become over the past year and change due to COVID-19.
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.
Ultimately, they want to know that you’re going to keep generating income month after month in order to make timely mortgage payments.
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 and/or shop around to find a more willing lender.
An Absence of Assets
- Having money in the bank is always helpful to get approved for a home loan
- It shows lenders you are capable of making mortgage payments even if your income is disrupted
- If you have nothing in the way of assets it could put your mortgage approval in jeopardy
- Be sure you’ve got a few months of reserves in a verifiable account for several months prior to application
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.
The key is to ensure any money is your own account several months before you apply for the refinance to avoid getting the third degree from your lender. Or consider a no cost refinance to reduce out-of-pocket expenses.
Your Refinance Is Subject to a Waiting Period
- If you just purchased your home you may need to wait X number of months to refinance
- You could also be subject to a waiting period if you experienced a past credit event, including forbearance
- Your current lender may also tell you there’s a waiting period to avoid commission recapture
- But there are exceptions and in many cases there isn’t any time limit in force
It’s also possible that a “refinance waiting period” applies to your particular transaction, for a variety of different reasons.
One of the more common ones has to do with cash out refinances, which typically require a minimum six-month waiting period.
Simply put, lenders don’t want you to pull equity immediately after purchasing a home, as that can raise some red flags.
Some exceptions include a property acquired via inheritance or divorce, or if using delayed financing, where a cash buyer pulls out some of their money shortly after closing.
Those who simply need a rate and term refinance shouldn’t face a waiting period in most cases, though if using the same lender you may be told you need to wait six months.
This is often an issue related to commission recapture that hurts loan originators or mortgage brokers who refinance their clients’ loans too quickly.
Lastly, you might also need to wait for X amount of time due to a past foreclosure, short sale, loan modification, or even mortgage forbearance.
Solution: Different loan types have different waiting periods, and going to a new lender could alleviate any wait at all. You may also be granted an exception for extenuating circumstances.
You Listed Your Home for Sale
- Banks aren’t keen on offering financing to borrowers who were unable to sell their home on the open market
- If no one is willing to buy your home, it might be hard to refinance it
- Once de-listed, there may be a waiting period of 6 months before you can get financing
- But some lenders today now just ask that the property be off the market at time of funding
If you happened to list your home for sale, then quickly realized no one was interested, or simply had a change of heart, 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.
While a waiting period may not apply, you will likely be asked to confirm your intent to occupy the property as your primary residence.
Additionally, the underwriter will probably scrutinize the listing price and appraised value to ensure the proposed value is supported.
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.”
Refinancing Without Being on the Loan (or Title)
- Title issues are another common roadblock to refinancing a mortgage
- If a future borrower can document payment history for the loan
- It can make it a lot easier to add this individual when you refinance
- And that could lead to better terms on your home loan
If you and a spouse or family member are currently living together, but only one person is a borrower on the existing mortgage, it might be in your best interest to make the mortgage payments from a joint checking or savings account each month.
This could make it easier to refinance the same mortgage in the future, assuming you want to include the individual who isn’t currently on the loan and/or title.
This need can come up if one borrower has significantly better credit than the other, and/or makes more money, etc.
There are myriad reasons why you’d want just one borrower on the loan, and if you can document a history of both individuals making the payments, refinancing should be possible with much less hassle.
Simply put, banks and mortgage lenders often want verification that whoever is taking over the existing loan has been making mortgage payments for at least the prior 12 months.
This may also alleviate the need for title seasoning, so a borrower taking over the mortgage can simply be “quit-claimed onto title” at the last minute as well. Two birds, one stone.
This issue can come up when the primary borrower has a poor credit score and elects to use another person, often a spouse, to apply for a rate and term refinance to obtain more favorable financing terms.
It can amount to big savings via a lower mortgage rate if the current titleholder/mortgagor has a low credit score and the spouse has a great score.
Alternatively, you could delay your refinance and attempt to improve your credit score so either borrower can be used to obtain financing. But for those in a time crunch, this method might prove to be a lot more effective.
Remember, this is a decision that has to be made in advance, so it’s something to think about long before you consider applying for another mortgage.
You Lack the Motivation
- Sure, getting a mortgage isn’t fun, no one ever said that it was
- But it’s one of easiest ways you can save a lot of money almost overnight
- The return on investment can be fantastic, even if the month-long process is painful
- Don’t be discouraged or buy into any rigid rules you might have heard about
Lastly, it might just be a matter of motivation, or lack thereof. It’s hard to get around to tackling simple tasks, let alone a mortgage refinance.
And everyone pretty much loathes the home loan process, likening it to getting a tooth pulled, or perhaps whatever’s worse than that.
Interestingly, it has gotten better lately, thanks to emerging technologies that remove some of the more tedious steps like document collection and faxing and all that.
Regardless, it can be one of the best returns on investment (your time) when it comes to saving money each month, so don’t let it pass you by.
For example, say a refi saves you $300 each and every month for the next 30 years.
If you consider the inverse, how easy would it be to all of a sudden make an extra $300 each month, and do so consistently for decades?
Others might be discouraged simply due to some refinance rule of thumb they’ve heard about, which may not actually apply to them.
For me, there is no single rule – there are lots of different scenarios that require unique perspectives.
In summary, don’t be complacent and don’t look at gift horse in the mouth.
Don’t assume the low rates will be around forever, or that you’ll always be able to qualify. Things can change in a hurry.
In closing, these are just a few of the many, many ways you may be denied a refinance. This isn’t 2006. It’s 2021. 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 home 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.