You can decide to refinance your home for many reasons: lowering your interest rate, reducing your monthly mortgage payment amounts, home improvements, or to cash-out some of the equity in the home. But what happens when you’re rejected? And, what steps can you take to get approved the next time around?
First things first, you should speak directly with the lender that denied your loan application. They should be able to tell you why you were denied and in what areas you’ll need to focus on for a better chance of being approved when you re-apply. In many cases, they can even provide you with a copy of your loan application and credit report, which can give you great insight into your application’s attractiveness.
Don’t get discouraged if your application was denied, there are many reasons why this may have happened. Here are a few of the most common reasons and how to improve these areas.
Why was your Refinance Loan Application Denied?
#1: Your Credit Profile Isn’t So Stellar
We all know that your credit history plays a huge role in determining whether you’re approved for a refinance or not, and is one of the biggest hurdles borrowers face if their credit is anything less than stellar. Credit scores not only affect loan approval, but also your interest rate. Lenders are not inclined to approve loan applications if the borrower’s credit score and payment history is unsatisfactory. Perhaps you’ve had a bankruptcy in your credit history or a series of delinquent accounts? MoneyCrashers.com shares some ways that a bad credit score can negatively affect you.
Another factor that may affect your credit profile is your debt-to-income ratio (DTI). If your DTI is too high, it can negatively impact your ability to be approved for your refinance. Consider using these steps to lower your DTI before your next loan application:
- Ask your lender for a copy of your credit report. If they cannot provide you with one, pull a free copy. Learn how to get your free credit score from the team at Fiscally Sound. In some cases, it’s a matter of correcting inaccuracies on your report.
- Minimize your debts by paying off credit card or other major debts. Doing so can significantly reduce your debt-to-income ratio and make you look more favorable.
- Look for ways to increase your income - whether through education, training or maybe taking on a part-time job. Raising your income will also impact your debt-to-income ratio in a positive way.
#2: The Appraisal Came Back Too Low
Appraisal issues have become a more common problem over the last decade with loan approvals. Often, the home does not appraise for what the borrower and lender expected and in some cases comes back lower than what’s owed on the house. This means that the borrower currently has negative equity. Take a look at these 4 smart moves to challenge a home appraisal from the team at Interest.com.
#3: You Own a Portfolio of Other Properties
If you’re a real estate investor, you may own several pieces of property in your town, state, or even on the other side of the country. While having several properties can mean a steady stream of income, it can also mean a huge disaster if the borrower runs into money issues. Lenders are hesitant to approve loans when there are several other properties awaiting repayment as well. Take a look at how investment properties affect you qualifying for new mortgages from the folks at ZACKS.
#4: Your Income is Hard to Verify
Income seems like it should be easiest thing to calculate and verify; however, for some people such as those who are self-employed or who own a small business, it can be difficult to prove their income through pay stubs. Other borrowers may find their application denied due to a lack of steady income, such as a severance package or legal settlement.
#5: Missing Deadlines on Miscellaneous Paperwork
Another reason for rejection for your loan application may be as simple as not getting the right paperwork to the lender or not having it submitted on time. When working with a lender, it is very important that you pay special attention to their requirements and deadlines to avoid delays or denials. Underwriters may require explanations, extra forms, additional pay stubs, or copies of your bank statements.
What to do if your Refinance Application is Denied
If you’ve found yourself in the same boat as others who have had their refinance mortgage application denied, you may want to consider some of these tips. They will help to improve the chances of getting your loan approval on the next round.
Trying a Different Lender: If you’ve been denied by one lender, that doesn’t mean that all lenders are going to deny you. Some lenders have alternative lending solutions or specialty loans that may work for your unique situation.
Improving your Credit Profile: Since your credit profile has a lot to do with whether your loan is approved or denied, this would be a key area to focus on when wanting to increase the chances of your next application being approved. Consider focusing on paying down some of your debt and making on-time payments consistently.
If you have a low or bad credit rating, consider trying to improve your score by following these tips from MyFico. There are tips you can do right now, plus additional information on how to fix your score and how to maintain a good credit rating.
Considering Alternative Loans: Talk with your lender about alternative loans to conventional financing or looking into peer-to-peer lending. These loans may end up costing more and have higher interest rates.
Getting Approved for a Mortgage Refinance
When in doubt, talk to your lender and ask them for a copy of your credit report and for specific ways to increase the chances of getting your loan approved. The answer might be something simple such as obtaining additional paperwork, or it may take longer if you need to work on reducing your debt. Either way, it’s not the end of the road and with a little help, you’ll be back on track to get your current mortgage refinanced.
Whether you’ve been denied due to bad credit or a paper mishap, don’t give up hope that you can refinance your mortgage. Be patient and work on fixing the suggested items from your credit report. If you’re still unsure what to do, pick up the phone and give us a call. At Lenda.com, we’re happy provide you with more information to help you get approved for your next loan.