4 Reasons Refi Applications Get Denied

Refinancing allows borrowers to reduce their monthly mortgage rates and payments, shorten loan terms and convert home equity to cash. But refinancing can be complicated — even responsible borrowers with relatively high credit scores and a history of timely payments can be denied.

What are the most common reasons why a refinance application may be rejected? Let’s explore four factors that play a large role in determining whether your application may be accepted.

1) Employment History

If your application shows less than two years of steady employment (preferably in the same field and/or position), your application is more likely to be denied. Lenders need to know that your income can support your monthly mortgage payments long-term. Constant career changes and long stretches of unemployment can suggest that you’re at a higher risk for default.

2) Low Home Appraisal

A home appraisal is used to determine the current market value of your property. This value is crucial, as your home serves as collateral on the loan. If the value isn’t high enough to justify the loan amount, the application will likely be denied. Several factors can contribute to a low appraisal, including poor property conditions, unfavorable comparables and a soft or declining market.

3) Insufficient Assets

Assets, particularly cash reserves, help demonstrate your ability to afford the mortgage. Most lenders prefer a borrower to have three to six months of cash reserves in case of emergency. Proceeds from personal loans and credit card cash advances aren’t typically considered, as they may jeopardize your ability to repay the loan long-term.

4) Questionable Credit

Most traditional lenders require a minimum credit score of 620 for refi approval. Other items of interest include past bankruptcies, collections accounts, too many accounts, high credit utilization and a high debt-to-income (DTI) ratio. Most lenders prefer a DTI ratio of 36% or less; 43% is the federal upper limit for approval.

If you’d like to explore your financing opportunities, reach out today for expert guidance.