Unfortunately, a history of paying your mortgage on time isn't
enough to qualify you for a
. In the current market, refinancing can be a rigorous process that
requires a home appraisal, documentation of your income and assets,
a review of your credit history and your debt-to-income ratio.
Falling short of a lender's requirements in just one of these areas
could trigger a refinance denial.
"The number one reason for a denial today is the lack of home
equity," says Eric Mullis, branch manager and senior loan officer
with Intercoastal Mortgage Co. in McLean, Va. "Some other borrowers
get turned down because their debt-to-income ratio is too high or
their credit score is too low."
If you've been turned down for a refinance, you still have
options. Since the law requires your lender to provide you with a
written explanation of why your application was denied, you can
either apply again with other lenders or fix the problem(s) your
lender identified and reapply when your situation has improved.
Joe Rogers, executive vice president of Wells Fargo Home
Mortgage in Columbia, Md., says that since lenders have different
qualification standards and offer different refinance programs,
homeowners shouldn't hesitate to shop around after a mortgage
denial. Other lenders will not be aware that you have been turned
down, he says.
While Mullis agrees, he says borrowers need to be realistic
about their financial situation following a
denial. "Someone with a debt-to-income ratio of 63 percent probably
shouldn't even apply for a mortgage refinance," says Mullis. "If
your debt-to-income ratio is over 45 percent you may have a problem
qualifying. We try to help as many people as we can, but sometimes
if there's not enough equity or their credit problems are too
severe, there's nothing we can do."
In his experience, Mullis says that about 85 percent of the
loans denied by one lender are virtually impossible to be approved
If lost equity is your main concern, you have a few options.
Depending upon how much equity you have lost, Mullis suggests
paying down part of your principal balance. If you don't have the
resources to do that, he suggests applying for a refinance through
Home Affordable Refinance Program
(HARP) which has no underwater restrictions whatsoever. Just
remember, HARP is still a voluntary program. Even if a lender does
participate, it can institute any additional restrictions or
qualification guidelines it sees fit.
If your issues are related to your debt-to-income ratio or your
credit, Rogers says you'll need to give yourself some time to pay
down your debts and
improve your credit score
before you can reapply.
Mullis says that borrowers denied a conventional refinance
should consider an FHA loan due to their more lenient credit score
and loan-to-value requirements. However, Mullis warns, the mortgage
insurance premiums on an FHA loan could subtract from your
potential monthly savings.
Dangers of a denial
Stan Ross, chairman of the board of the University of Southern
California Lusk Center for Real Estate in Los Angeles, says that
homeowners who are denied a refinance are more likely to default on
their loan or walk away, particularly if they have little or no
home equity. If you're struggling to pay your mortgage, Ross says
homeowners need to reach out to their lender or servicer right away
to find the right way strategy to keep you in your home.
Pressure from government regulators has led many mortgage
lenders to overcompensate and deny too many loans, says Ross. "It's
almost like these lenders are shooting themselves in the foot,
though, because they would be better off if they would be less
Rather than give up after your refinance application is denied,
experts recommend that you seek out experienced mortgage lenders at
additional financial institutions, such as a direct mortgage
lender, a credit union or a community bank.
"Some community banks make their own portfolio loans which could
be available to you, especially if you have been a long-term
customer," says Rogers. "At Wells Fargo, because we are the largest
mortgage lender, we try to provide as many loan options as possible
Mullis says that the best way to prevent any refi surprises is
to be fully prepared before you apply. Borrowers must get an
accurate estimation of their home value, credit score,
debt-to-income ratio, as well as gather all the necessary paperwork
before visiting a lender.