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If your application to refinance your mortgage loan was denied, it's not the end of the line. Depending on your situation and goals, you may be able to get what you need in a different way.
If not, it's important to understand the reasons for the denial and take steps to improve your odds the next time you apply.
Common Reasons Your Mortgage Refinance Was Denied
There are several reasons why a mortgage lender may reject a refinance application. Here are some of the potential causes.
Credit Issues
You'll typically need a credit score of 620 or above to get approved for a refinance loan, though some home loan programs have less stringent requirements.
But even if your score meets that threshold, you may still be denied if you have some serious negative items on your credit reports, such as late payments or collection accounts. Alternatively, you may have too much debt, or your credit utilization rate—the percentage of the available credit on your credit cards compared to your balances due—is too high.
If you've been denied due to information found in your credit reports, you'll receive an adverse action letter detailing the reasons and informing you of your rights.
Income or Employment Issues
A lender may reject your application if it believes that your income is too low or unstable to handle the payments on a new loan. Having some recent instability in your job can also make it difficult to get approved.
If you've been unemployed recently or you switched careers, mortgage lenders will often want to see at least two years' worth of income history.
Additionally, if you have a large amount of debt, your debt-to-income ratio (DTI)—the percentage of your gross monthly income that goes toward debt payments—may exceed the lender's maximum. In many cases, lenders want to see a DTI lower than 43%, though some loan programs can go as high as 50%.
Low Home Appraisal
When you refinance a home loan, the lender will typically require an appraisal to determine the property's current market value. If the appraiser finds significant issues or the value of your home has declined, it may not be enough to justify the amount you're looking to borrow.
Insufficient Equity
In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.
That said, some lenders allow higher loan-to-value ratios on refinance loans for borrowers with excellent credit, so you may be able to simply try a different lender.
Not Enough Assets
Part of proving your ability to repay a mortgage loan is having sufficient cash reserves—often a few months' worth of mortgage payments and other basic expenses. If you don't have enough cash on hand, the lender may be hesitant to approve your application.
Also, keep in mind that if you've received a large sum of cash in the last few months, the lender will typically want to know the source. If it's the proceeds from a personal loan or credit card cash advance, for instance, the lender may not consider it when calculating your cash reserves.
Alternatives to Refinancing
If the reason you were denied requires you to do some work before you can apply again, consider other ways you can accomplish your original goal. Here are some potential alternatives to compare.
Home Equity Loan or HELOC
If you were hoping to get cash out of your home with a refinance loan, consider applying for a second mortgage in the form of a home equity loan or home equity line of credit (HELOC).
Like a mortgage loan, a home equity loan is an installment loan. You'll get a fixed interest rate and a fixed repayment term. In contrast, a HELOC is a revolving line of credit that you can access when you need it, only paying interest on the amount you borrow, albeit with a variable interest rate.
Personal Loan
If you need cash, but your credit isn't good enough for a home equity loan or HELOC, you may consider a personal loan instead. Some lenders work with borrowers across the credit spectrum, though it's important to compare interest rates, fees and other terms before you select one.
Get prequalified for personal loan offers to get an idea of what you can expect.
0% Intro APR Credit Card
If you have great credit but you were turned down for other reasons, you may consider an introductory 0% APR credit card. These cards offer an introductory period during which you'll pay no interest on eligible purchases or balance transfers—depending on the card and type of offer, the introductory period can last between six and 21 months. As long as you repay the balance during the intro period, you won't end up with costly debt.
Research Relief Options
If your goal for refinancing was to lower your monthly payments to make them more affordable, you may consider other options to get the relief you need:
- Review your budget. Take a look at your expenses over the past several months to get an idea of whether you can cut back in some areas to free up cash for your mortgage payment and other necessities.
- Get help with your payment. You may consider renting out some space in your home or having adult children who live with you help with the monthly payment so it's not as burdensome for you.
- Reach out to your lender. If you need a temporary break on the payments, consider asking for a mortgage forbearance. You can work with your lender to reduce or suspend payments for a fixed number of months, then make up the missed or reduced payments later. If you think you'll have problems making payments over the long term, you could ask your lender for a loan modification to either extend the term or reduce the interest rate on your mortgage so you pay less each month.
- Look at other debt relief options. If you have a lot of other debt, you may look into ways to get relief from those instead of messing with your mortgage loan. Options may include a debt management plan, debt settlement or even Chapter 13 bankruptcy. Just be sure to carefully weigh the pros and cons of these options before making a decision.
How to Improve Your Credit
If your credit score is low, improving your credit can help you not only get approved in the future but also make it easier to secure favorable terms. Here are some steps you can take:
- Review your credit report. Start by reading your credit report to get an idea of which areas need some work. Additionally, keep an eye out for inaccurate information on your report, which you have the right to dispute with the credit reporting agencies.
- Pay down debt. Start with your credit card balances to reduce your credit utilization rate. Then, focus on loans with small balances so you can lower your DTI. Even a little extra toward your debts each month can help you get out from under the debt faster.
- Always pay on time. Your payment history is the most influential factor in your FICO® Score☉ , so make it a priority to pay all of your bills on time to avoid further damage to your credit.
- Limit new credit applications. Try to avoid taking on more debt in the form of additional credit card debt and new loans. In general, it's best to space out credit applications by at least six months.
Continue to Monitor Your Credit Throughout the Process
As you work to achieve your financial goals, it's important to monitor your credit regularly to understand how your actions impact your credit health and to spot potential issues before they negatively impact your credit score.
With Experian's free credit monitoring service, you'll get access to your Experian credit report and FICO® Score, plus alerts when changes are made to your report.
