Refinancing is a great way of saving money on your mortgage when interest rates are low. Refinancing has strict guidelines, and making your mortgage payments on time may not be enough to convince your lender to allow you to refinance. Refinancing requires a home appraisal, a significant number of documents that show your income and assets, and a good credit score. Not meeting one of the lender’s requirements may result in a denial. Fortunately, being turned down for refinancing is not the end of the world and you should know that you still have options. Here are a few reasons why you may be denied and what you can do to make refinancing possible.
Little or No Equity in Your Home
The number one reason why home owners are being refused when trying to refinance is the lack of home equity. Your problems don’t even have to go as far as being underwater on your mortgage, or owing a larger amount than your home is worth. Simply having low or no equity in your home can trigger a denial from your lender, because they prefer a borrower who has a nice amount of cash tied up in his or her home. The simplest way out of this situation is to come up with more cash, but, if you take into account the high refinancing closing costs, you might realize that a few extra thousands will be hard to find.
An alternative would be the Home Affordable Refinance Program (HARP), designed by the government to help home owners with little or no equity in their homes. Recently, this program has undergone some changes, which should help you get approved easier than before. The program is designed for home owners who have less than 20 percent equity in their homes, but some lenders might use their own guidelines when deciding if you qualify for HARP.
Another alternative would be refinancing into a Federal Housing Administration (FHA) mortgage. FHA mortgages require a low down payment and equity, but you may be required to pay additional insurance on this type of government insured mortgage loan.
Low Credit Score
Your credit score has a large impact on not only your interest rates and the loan value, but also on whether you will be allowed to refinance or not. If your credit score is bad, your only chance of refinancing is by improving it. It might take a year or two, but if your credit score wasn’t affected by anything major, you should get it into a more favorable range with little effort. Paying your bills on time is the first and most important step when trying to increase your credit score. If, however, you have a large blemish on your credit report, such as a bankruptcy, then increasing your credit score will prove to be more difficult and can take up to 10 years.
Low Income
Lenders usually require your debt to not exceed 43 percent of your monthly income, while monthly mortgage payments, property taxes and insurance are limited to 30 percent. Reducing your debt can help tremendously when trying to look better in the eyes of a lender. You could quickly pay off some or all of your debt if you have access to savings or other investments. Some of these solutions might not be the best, and it all depends on your situation, and how much you want or need to refinance.
Of course, the simplest thing you can do when being turned down for refinancing is talking to another lender. Lenders are in competition and sometimes have significantly different offers for their customers, so shopping around is always a great idea, even if you are approved by one lender. You might find a more attractive offer with a lower interest rate or closing costs somewhere else. Don’t be discouraged if your refinancing is declined because there are ways in which you can drastically improve your chances in a very short amount of time.