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
- Lenders typically want an LTV below 100%
- Though there are some government programs that address underwater mortgages
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
- If your loan amount is too large
- You might have trouble obtaining home loan financing
- This is especially true if it’s a jumbo and your credit score isn’t great
- Fortunately lenders are beginning to ease guidelines
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.
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
- Even if you have plenty of equity and assets
- A low credit score can sink your refinance application
- Make sure your scores are in great shape
- Well before you apply for a refinance
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.
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.
- A solid income
- Is a necessity when it comes to getting approved
- If you get paid seasonally
- Or experienced a big drop in earnings it could be a problem
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
- Lenders typically want two years of steady employment
- In the same position
- Or at least the same line of work
- Make sure you aren’t job hopping too much
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
- Having money in the bank
- Shows lenders you are capable of making mortgage payments
- If you have nothing in the way of assets
- It could make mortgage approval a bear
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
- 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
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.”
Refinancing Without Being on the Loan (or Title)
- This is another common roadblock to refinancing
- 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 use 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 much hassle.
Put simply, 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 also alleviates 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 often comes up when the primary borrower has a poor credit score and elects to use another person, often a spouse, to rate and term refinance the home loan 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.
In closing, these are just a few of the many, many ways you may be denied a refinance. This isn’t 2006. It’s 2018. 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.