If you are looking to lower the interest rates on your monthly mortgage payments, refinancing may be the answer. But, according to a recent study by Lending Tree, even though most mortgage refinances were approved at the start of 2021, many were denied. Those who could not get refinanced were declined for many of the same reasons, from a high debt-to-income ratio to poor or no credit history. Here are four common reasons you may have been denied refinancing, and how you can up your chances.
Poor Credit History
Before you submit your refinance application, check your credit history. Because this is the second most common reason for denial, having a grasp on your credit report can help you understand what steps are needed to build up your credit to a score of over 700. If you do have a low credit score and the information on your credit report looks correct, start by paying off your debts to lower your overall utilization rate. If you have no credit history, or haven’t had it long enough, a lender may not be willing to offer refinancing. Talk to a close family member or friend who is willing to add you to their credit profile, as their credit history can be added to your profile, boosting your chances for approval.
High Debt-to-Income Ratio
Your debt-to-income ratio is the percentage of your monthly gross income used to pay off your debts. If too much of your monthly income is used to pay down debts, it is common for mortgage lenders to deny applications. Before you seek refinancing, pay down or eliminate your current debts, even if that means cutting back on non-essential items or frivolous purchases in the meantime. Your goal should be to get your debt-to-income ratio below 43%, however, most lenders prefer a 36% utilization rate.
Insufficient Collateral
When refinancing, your house serves as collateral. However, if the appraised value of your property comes in lower than expected, this can affect your chances for being approved for refinancing. Lenders look for a minimum of 20% in home equity, but without that, and if you owe more than what the house is worth, your application may not even get through. Another reason that using your home for collateral may not be enough may depend on the time you have been living there. If you have only been in your home for a short period of time, and have yet to pay down your principal balance enough, a lender will likely reject your application.
Incomplete Application
Many homeowners will start a refinancing application, but leave it incomplete if they decide to go in a different direction. However, this can potentially sabotage your chances for approval on any future refinancing goals. Whether you have little to no credit history, a high debt-to-income ratio or insufficient collateral, these applications can become overwhelming and easily abandoned. Instead, contact your lender, as they will have a team of experts who are dedicated to helping homeowners through the application process and answer any lingering questions. With all of the information you need to include, as well as the different forms and paperwork required, having extra help can lead you to approval.
Understand what lenders are looking for and get all of your information squared away before you submit your application. Remember, refinancing isn’t right for everyone, despite lower interest rates. Talk to your lender or a financial advisor to review your credit history and information to find what the best option is for you.
