If your mortgage refinance application has been denied, here's what to do next.
Obtaining a new mortgage can result in a lower interest rate, reduced monthly payments, and the ability to access additional funds based on the equity in your home.
Though not all homeowners are approved for refinancing, there could be various reasons for denial, including poor credit or a decrease in the value of the house.
Despite high home prices and interest rates, lenders remain cautious in approving refinancing applications. If you've been denied refinancing, there are still options available to you, as well as ways to increase your chances of approval in the future.
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Common reasons mortgage refinancing is rejected
Fannie Mae and Freddie Mac provide federal underwriting guidelines that lenders use to determine whether to approve refinancing applications. Some issues are more easily resolved by borrowers than others.
High debt-to-income ratio
The amount of your money that is being used to pay off debts is a significant factor in determining whether you will be approved for refinancing. Your debt-to-income (DTI) ratio is calculated by dividing your total monthly debts, including your current mortgage, by your gross monthly income.
Experian recommends a DTI of 35% or less for ideal mortgage applications, but lenders may consider a ratio up to 43% for refinancing a conventional mortgage, based on the strength of the rest of the application.
Low credit score
To secure refinancing, a credit score of at least 620 is typically required, although you may be eligible for FHA cash-out refinancing with a score in the 500s.
Low home appraisal
Determining the fair market value of your home can help you avoid an "underwater mortgage," where your home is worth less than what you owe.
If your home appraisal reveals poor condition or substandard renovations, it may result in rejection.
Not enough home equity
The amount of your home that you own outright is referred to as home equity. If you make a 5% down payment, you begin with 5% home equity. This amount grows as you pay off your mortgage and as the value of your home increases. To refinance your mortgage, you usually need to have at least 20% equity in your home.
Employment history
Fannie Mae's underwriting guidelines require lenders to consider an applicant's career history and income over several years. While it is ideal to have at least two years at your current job, you won't need to worry about promotions or better-paying jobs in the same industry. The key is a consistent income.
While taking a lesser role or lower-paying job and lengthy gaps in employment are more serious red flags, you can always try to explain your circumstances to your lender.
What to do if you've been rejected for refinancing
Find out why you were denied
Lenders are legally obligated to provide a reason for denial. Discover the cause(s) and make any required adjustments to increase your chances of approval in the future.
Shop for another lender
Rocket Mortgage offers financing to borrowers with lower credit scores, unlike most lenders that require a minimum score of 620.
Pay down your existing mortgage
If you didn't put 20% down when you bought your home, you may need to pay off another chunk of your mortgage before you can secure refinancing.
Work on your credit
To improve your credit score, consider taking a break from work to focus on paying your bills on time and reducing your credit utilization ratio. Additionally, avoid opening or closing any credit lines and verify the accuracy of your credit reports.
Look into specialized refinance programs
Borrowers with government-backed mortgages may be eligible for assistance with refinancing.
If you have a Federal Housing Administration (FHA) loan, you may be eligible for the FHA Streamline refinance program, which does not require borrowers to prove their home equity.
The IRRRL offered by the Department of Veterans Affairs can lower the interest on your existing VA home loan, with minimal costs and no appraisal required. A reduction of just 0.5% can result in significant savings over the course of your loan.
If your loan is underwritten by Freddie Mac or Fannie Mae, you may be eligible for their Refi Possible ® or ReFi Now programs, which have higher debt-to-income ratio requirements and guarantee a rate drop of at least 0.50%.
How long should I wait before applying again?
Before applying again, it's important to determine why you were rejected. If your credit score was low or you lacked home equity, address these issues first. If your rejection was due to a recent job change, you may need to wait up to two years before reapplying.
How to lower your mortgage payments without refinancing
Refinancing may not be feasible due to denial or high rates. However, there are methods to reduce your mortgage payment without refinancing.
Get rid of mortgage insurance
If you have a conventional mortgage, your lender may automatically cancel PMI when you reach 22% equity. However, you may be able to request cancellation once your equity reaches 20%.
Recast your mortgage
Some lenders offer the option to make a substantial payment towards the principal of your mortgage and then re-amortize the loan, keeping the terms the same. This results in smaller monthly payments and a decrease in the total interest paid over the life of the loan.
Request a loan modification
If you're struggling financially, you can request a permanent modification of your mortgage terms to prevent foreclosure or request a forbearance to temporarily reduce or pause your mortgage payments. However, you will need to repay any late or suspended payments at a later date.
Bottom Line
Refinancing may be denied for various reasons, including a low credit score or a new job. If you understand the reason for rejection, you can address the issue and reapply.
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Not all payments are eligible for boosting, and some users may not see an improvement in their score or approval chances. Additionally, not all lenders use Experian credit files or scores affected by Experian Boost™. For more information, please visit our website.
