If you’re searching for reasons why your refinance was denied, your lender should be able to give you an exact answer. They’re required to give you an “adverse action” notice with reasons for the loan rejection.
When you refinance, you’re taking out a new loan to pay off and replace your current mortgage, which means you’ll need to qualify all over again. Each lender you apply with will want to take a look at your income, credit, debt and property value to verify your financial situation. If it has changed since you first bought your home, your refinance may be denied.
If your lender denied your mortgage refinance, it’s not the end of the world. Just because one lender denies your home loan application, it doesn’t mean every lender will. Be sure to ask for the specific reason you were denied. The lender must share which factors led to your denial, and they have to provide the details in writing.
6 common reasons a refinance is denied
Refinance denial reasons tend to fall into one of a few categories, according to data collected under the Home Mortgage Disclosure Act. Here are the most common:
- You have too much debt
- You have bad credit
- Your home value has dropped
- Your application was incomplete
- Your lender can’t verify your information
- You don’t have enough cash
You have too much debt
The most common reason why refinance loan applications are denied is because the borrower has too much debt. Because lenders have to make a good-faith effort to ensure you can repay your loan, they typically have limits on what’s called your debt-to-income (DTI) ratio. This ratio compares the amount of money you bring in each month to the total monthly payments you make toward your debt.
Things You Should Know
The federal government considers a 43% DTI ratio the upper limit for mortgage approvals. Ideally, your DTI ratio should be 36% or lower. If your new mortgage payment puts you above the refinance debt-to-income ratio, your application may be denied.
You have bad credit
Your credit score gauges how likely you are to repay a loan and is usually measured on a scale from 300 to 850. To be approved for a conventional mortgage, you typically need a minimum 620 credit score. If your score is below the mid-600s, however, you may have a harder time qualifying for a refinance.
Your credit score can change over time. If you’ve had some credit mishaps since you took out your existing mortgage and your score has dropped, there’s a chance you can’t refinance your mortgage.
You may also be denied for a refinance even if your credit scores are acceptable, but you recently went through bankruptcy. The waiting period ranges from one to four years, depending on the type of mortgage you’re applying for.
A low credit score raises cash-out refinancing costs
Conventional lender fees are higher for cash-out refinance transactions. Even if you don’t end up with a loan denial because of a higher rate, the refinance may not make sense if you have to pay thousands of extra dollars in closing costs or hundreds more on your monthly payment.
Your home value has dropped
When you apply for a mortgage refinance, your lender will want to make sure the property is worth enough to justify the refinance. If it’s not, your loan may be denied. When you take out a mortgage, your lender uses your home as collateral for the loan. This means that if you fail to repay your loan, the lender takes possession of the property through the foreclosure process.
This can be an issue if your home’s value dropped significantly since you took out your first mortgage. You may find yourself underwater on your mortgage, meaning you owe more than the property is worth. In this case, it can be difficult to be approved for a refinance loan.
You may also be denied if your home is in poor condition, or if you made improvements that weren’t permitted by local housing authorities.
Your application was incomplete
A surprisingly common reason refinance applications are denied is because your loan application was incomplete. If your lender doesn’t have all the information they’ve asked for, they may choose to send you a letter informing you that your application is incomplete, or they may simply deny your refinance.
Pay close attention to the documents and data your lender is asking for when you apply for a refinance loan. This could include pay stubs, W-2 forms, tax returns or other documents needed to verify your income. Give yourself plenty of time to collect it all.
Your lender can’t verify your information
Lenders will double-check to verify some information in your mortgage application, like your employment history. They may contact your current or former employers to see how long you worked there. If your lender has trouble with this process, your mortgage may be denied.
You don’t have enough cash
When you refinance a home, you often have to bring some cash to the table to pay for closing costs and fees to close the new loan. Sometimes, your lender is willing to roll these costs into your loan or give you a credit in exchange for charging you a higher interest rate, which is also known as a no-closing-cost refinance. This isn’t always an option, though, and “insufficient cash” is a fairly common reason lenders deny refinance applications.
As you move on from a refinance denial, there are some steps you can take to improve the chances your loan application will gain approval in the future.
Check your credit report for errors
If your refinance was denied due to your credit history, your lender must tell you the numerical score they reviewed and the agency that provided it. You can get a free copy of your credit report from the major reporting agencies. Take a close look at the report and make sure all the information is accurate. If you see something on your credit report that you don’t think is legitimate, you can dispute it. The bureau is then required to investigate the matter and make corrections to the report, if needed.
Common errors on your credit report can include credit cards or loans that aren’t yours, incorrect balances reported on credit lines, incorrect late payments that were actually made on time and multiple accounts reported for a single debt. These errors could lower your credit scores enough to make you ineligible for a refinance.
Take steps to improve your credit
If your credit score is keeping you from refinancing, you’ll want to raise it as quickly as you can. Since your payment history makes up 35% of your credit score, the most important thing you can do to improve your credit is to make sure all your mortgage payments and other bills are paid on time. Do what you can to make current any past-due accounts. Try to keep your credit card balances under 30% of their limit, and only apply for loans you absolutely need.
Work on paying off your debt
Paying down debt lowers your DTI ratio and may improve your credit score. Try to pay off some of your bills completely, whether that means eliminating a personal loan or paying off your auto or student loan. In the meantime, avoid taking on new debt. Remember that additional monthly obligations will skew your DTI ratio and make it harder to refinance your mortgage.
Try a specialized refinance program
If you keep getting denied due to your home’s value, there may be a specialized program that can help. There are non-qualified mortgage (non-QM) lenders that offer refinance programs with no waiting period after a bankruptcy or foreclosure. If your loan was denied because your lender couldn’t calculate enough self-employed income to qualify you, bank statement programs are available that allow you to avoid providing tax returns.
