What to Do If You’re Denied Mortgage Refinancing — and What It Will Cost You

Each lender has its own rules for approving and denying mortgages.

As interest rates continue to touch on historic lows, you might want to refinance. A mortgage refinance can get you a lower monthly mortgage payment, a shorter loan term or cash back. All of these alternatives can save you money.

Mortgage rates have been low for so long that you might not remember the days when rates were higher. In 1981, home mortgage rates peaked at 16.63% APR, according to Freddie Mac. Average rates gradually fell, but were still 9.25% APR in 1991.

In contrast with those sky-high rates, home mortgage interest rates in recent years have been low. Since 2010, they have been below 5% APR. Anyone who took out a mortgage prior to 2010 might want to consider a home loan refinance.

Benefits of Refinancing Your Mortgage

Deciding to refinance a mortgage offers several potential benefits:

  • You can lower the interest rate. Doing so should reduce your monthly payment amount.
  • You can shorten the loan term. For example, you can switch from a 30-year, fixed-rate loan to a 15-year, fixed-rate loan to save money on total interest payments.
  • You can create more certainty. If you currently have a mortgage with a variable interest rate, you can switch to the certainty of a fixed interest rate.
  • You can take out a loan. If you have equity in your home, you might refinance the mortgage and take out some of the equity to use for home remodeling or other purposes.

Contacting a bank or mortgage lender is the simplest way to apply for a mortgage refinance. Look to an accredited mortgage professional certified by the Mortgage Bankers Association for help refinancing your mortgage. Additionally, you can check out your state’s low mortgage rate lenders on GOBankingRates and use lenders’ online mortgage refinancing calculators to see how much money you might save by refinancing.

Despite your best efforts, it is possible your mortgage refinancing application will be denied. By understanding why your application was denied and exploring options from various lenders, you can take steps to refinance successfully after you’ve addressed financial concerns, chosen a new lender, or both.

Related: How to Negotiate a Lower Modified Mortgage Loan

Why Lenders Deny a Mortgage Refinancing Application

Lenders might deny your mortgage refinancing application for many reasons, including the following:

  • Your mortgage is underwater. An underwater mortgage is one in which you owe more money than the house is worth. Home prices fell during the recent recession’s “mortgage meltdown,” and many mortgage holders were left with mortgage debt greater than the value of their homes.
  • Your income is too low or unstable. If your income does not meet a certain level, a lender might be hesitant to grant you a loan.
  • Your credit score and credit history are weak. If you have negative marks on your credit report, such as missed payments or other credit flaws, a lender might deny your request to refinance.
  • Your debt-to-income ratio does not meet the lender’s criteria. Each lender has specific requirements. For example, consider a lender that requires a 40 percent debt-to-income ratio. If you earn $5,000 per month and owe $2,500 in debt payments per month, your 50 percent debt-to-income ratio will not meet that lender’s requirement.
  • Your home’s appraisal value is too low. For example, you might want to refinance a home you bought for $400,000 with a $320,000 mortgage. If the home is appraised at $375,000, you might only be allowed to refinance 80 percent of the home’s value, or $300,000.

Related: How to Refinance If Your Home Appraisal Value Is Too Low

Mortgage Refinancing Options When Your Application Is Denied

Do not despair if a lender denies your application to refinance a mortgage. You might fear that you will be stuck making large mortgage payments with higher interest rates indefinitely, but you likely have more options.

First, find out why your mortgage application was denied. The law requires the lender to explain why your application was denied. You might want to correct the problem that triggered the denial first. Or, try another refinancing solution, such as one of the following:

  • Apply with a different lender. Not all lenders are the same, and underwriting guidelines vary from lender to lender. If you are turned down by one lender, try another one.
  • Apply with your current lender. If you looked first applied for refinancing with a new lender and were turned down, consider turning back to the lender behind your current mortgage. Check your lender’s mortgage refinancing rates to find out how much money you might save. Your current lender might be anxious to retain your business.
  • Investigate FHA programs. The Federal Housing Authority helps borrowers by offering affordable lending solutions. FHA loans include refinance loans and cash-out loans for consumers. The FHA Short Refinance loan can assist consumers with negative-equity mortgages.
  • Consider the Home Affordable Refinance Program. Established by the Federal Housing Finance Agency, this government program is designed to help consumers with underwater mortgages. If your loan is owned by Fannie Mae or Freddie Mac and you are current on your mortgage payments, you might be eligible for a HARP loan. The HARP program expires on Dec. 31, 2016.
  • Improve your credit score. Ultimately, lenders want low-risk borrowers who have good credit scores. If your credit score is low, raising it might improve your refinancing opportunity. First, get a free copy of your credit report and dispute any errors. Next, reduce your existing debt levels and set up payment reminders to pay your bills on time.

What the Application Denial Could Cost You

If your mortgage refinance application is denied, you could lose out on some fees and potentially a significant amount of time. When you plan to refinance, try to budget a realistic range of time for the process and savings for mortgage refinance fees in case you are denied so that you can minimize the impact of a denial. Otherwise, your attempts to refinance could be further delayed as you save up to restart the process.

Several mortgage refinance fees aren’t assessed unless the loan is approved — and some might even be waived during loan closing negotiations — but you might still be responsible for paying an application fee even if your application is denied. This fee can range from about $50 to $500, depending on the lender and loan.

Other fees to prepare for in case your loan is approved include but are not limited to:

  • Loan origination fees
  • Property appraisal fees
  • Miscellaneous service fees for credit checks, document processing, underwriting, etc.
  • Discount points, or prepaid interest
  • Title fees and insurance
  • Taxes

The biggest cost of an application denial, however, might end up being the amount of time you invested in the process. The more prepared you are with all of the necessary documents to include with your application, the better your chances of making the process more efficient. If you leave information out, you risk having to spend several additional days corresponding with your loan processor to complete the application.

The entire refinancing process can take 30 to 90 days, depending on the lender, your application and you. Whether your application is denied early on during the application review or the loan falls through later on during loan processing and underwriting, you could end up losing several weeks of time.

Be Persistent If Your First Mortgage Refinancing Application Is Denied

Ultimately, if your mortgage refinancing application is denied, you have options. Take a step-by-step approach to find out why the application was denied. Then, map out a plan to better your loan qualifications, improve your credit profile and apply for a different mortgage refinancing solution. With added effort, you can improve your chances of getting approved for a mortgage refinance loan.

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  • Really interesting discussion on mortgage refinancing. It’s no doubt a complex but really important issue. Great stuff Stacey!

  • When you are turned down on a refinance, ask the lender to tell you why you were denied. Get it in writing if possible. You can then go back to the drawing board, make the necessary adjustments then apply again to the same lender. If you can’t fix all the issues this specific lender requires, shop around. But before submitting a formal application, ask for an interview, and determine what the new lender will be looking for.

  • PacificCoaster

    We were turned down because my retired husband has a small business he operates from our home. We don’t derive hardly any income from it but this company assured us it was common practice to deny refinances to homes with a home business. The interesting part is they financed us 3 years ago and we had the business then. I wondered if this is correct or if they were just trying to avoid the refinance because it fell within their guarantee so it is essentially free and they won’t make anything.

    • Hyacinth

      We were turned down after we made it through the gate. 50K cash out waiting and they pulled our credit rating that day and voila’ 2 late mortgage payments showed up and screwed the whole thing. Yep, I paid on time but it was on a Friday both times and the bank didn’t get it through until after late date. So, that’s another story for the books. Killed me. I am just not perfect

  • cmanning

    we have excellent credit collateral and where still turned down for loan without good reason.

  • Miller987

    Recently, my husband and I applied for a refinance loan. I am both appalled and embarrassed to have received a refinance denial letter.

    My husband owns an S corporation with sales at $1.7 million
    in 2012. I own a small business with sales a little over $100K. Because my
    husband’s company showed a profit in 2010, a loss in 2011 and a profit in 2012,
    the underwriter questioned us. So because we purchased equipment in 2011 to
    expand our company and create more jobs, we are penalized and cannot refinance?
    Because we had a baby in 2009 and 2011 which only allowed me to work part-time,
    we are penalized and cannot refinance?

    The largest question I need answered is this – With refinancing,
    we would take our loan from 30 years to 20 years and go from paying $1400/month
    to $1100/month. And let’s not forget to mention that we make an extra payment
    each year on our current mortgage. So why are we not able to qualify for a loan
    that would lessen the amount we actually pay??

    Clearly, it does not pay to own a small business. Expanding
    and creating jobs for our company has rendered a negative for our personal

    Instead of advising us on what may need to be paid off, we
    have been denied, without being given the chance to qualify. The only debt we
    have is 2 auto loans, which we make extra payments on each month. We do charge several
    monthly expenses to a points accumulating credit card, but pay it completely
    off each month and have never paid a finance charge on it.

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  • Conor

    I refinanced my mortgage a year ago, really glad I did it. My condo had appreciated enough value that I was able to refinance and get rid of my PMI since what I owed was now equal to less than 80% of my property’s value. So glad I don’t have to pay that anymore, even if the process was a little nerve-wracking.