Many homeowners seeking to reduce their mortgage payments have looked into mortgage refinance options, especially since, for the most part, mortgage interest rates have been much lower than in previous years.
However, a number of the same homeowners have been surprised to learn that after applying to refinance, they have been turned down. What could contribute to a lender’s decision to deny a refinance? Even more importantly, what can you do if you are among the homeowners who have been turned down?
Why Homeowners Decide to Refinance
Choosing to refinance a home is something homeowners have been doing for many years. The process involves the homeowner obtaining a new primary mortgage to replace an original mortgage and usually results in better mortgage rates and terms than what were included in the original mortgage.
There are a number of reasons why homeowners choose to refinance, including:
- Lower interest rates: As noted, a person who refinances their home is usually looking to reduce their interest rates.
- Reduced mortgage payments: Another reason homeowners opt to refinance is because they have the opportunity to reduce their monthly mortgage payments. This is usually accomplished by lowering interest rates, extending the term of the mortgage, or both.
- A cash-out option: Some homeowners decide to refinance their homes due to a cash-out refinancing option that allows them to liquidate all or part of their home’s equity while, in many instances, still helping them lower interest rates and mortgage payments.
Overall, many believe that the benefits of refinancing a home outweigh any potential negatives. In fact, aside from the risks associated with cash-out refinancing, the only major risk of refinancing is being turned down altogether.
Reasons a Refinance is Turned Down
A recent Money Crashers article on USNews.com explored the disappointment of being turned down for a refinance after completing the process of filling out a mortgage refinance application, getting an appraisal, paying fees and more.
Homeowners like Erik Folgate sometimes experience this problem because, as told by their lender, they’re not qualified to refinance. Here are some reasons that a homeowner could be deemed unqualified:
- Unsatisfactory credit history: Lenders are inclined to turn down a refinance if the homeowner’s credit score or credit history is deemed unsatisfactory. It’s good to keep in mind that credit score standards have changed. If you were able to get financed with lower than a 620 score four years ago, getting refinanced with the same score now could be difficult.
- Low appraisal: A low appraisal, meaning that a home is worth less than the amount owed on the mortgage (negative equity), could result in a homeowner being turned down for refinance.
- Inconsistent or unacceptable income: For some, the process flows smoothly until the lender discovers that that a homeowner does not have pay check stubs to prove they earn a steady income, often due to self-employment or operating a small business. Other homeowners have found their income is considered unacceptable because it comes from a severance package or another resource that is expected to end.
- Too many properties owned: A real estate investor could also have problems refinancing a home if a lender discovers they own more than four properties. This is because lenders are leery of a lender’s ability to repay the new mortgage with too many properties also awaiting repayment.
Being turned down for a refinance can be difficult for homeowners, not just because they don’t have the opportunity to receive the benefits they were hoping for, but also because, in many cases, they lose their appraisal fee, which could surpass $500.
What to Do If Your Refinance is Denied
So if you find that after you’ve gone through all the steps to refinance your home, you’ve been turned down, you might consider a few tips to be reconsidered–and possibly get the successful refinance you’re looking for:
- Look for another lender: It’s recommended if you are turned down you keep looking for a lender to work with. If you have already lost money in the process, however, it’s a good idea to proceed with caution as you approach new lenders.
- Consider government programs: Many homeowners who have been strapped with underwater mortgages have looked for ways to modify, or in many cases, refinance their mortgages. See a list of current mortgage loan relief programs.
- Reduce your debt: If your credit history or credit score are compromised by excessive debt, consider paying down auto loans, school loans, credit card debt or other personal loans to increase your score and your chances of being approved.
- Work with FHA: Another option to consider is looking for a lender who doesn’t require an appraisal or high credit score. Many find that a FHA mortgage refinance works well in accomplishing both goals. Because FHA requires a lower credit score, it’s easier to qualify. And as a part of the “streamline refinance” option, no appraisal is required.
Unfortunately, those who work as real estate investors may have a more difficult time working around a declined refinance because lenders simply don’t like the idea of refinancing when multiple properties exist. This doesn’t mean refinancing is impossible. It just means that you will want to follow the above mortgage refinance advice and continue pushing in hopes of convincing a lender to work with you.