Refinance Rejection: Why It Happens and What To Do Next — Refinancing your mortgage can potentially save you thousands of dollars over the life of the loan through a lower interest rate or more favorable terms. However, having your refinance application rejected can put a damper on those plans. Rejections do happen occasionally, even for borrowers who may have previously qualified for a loan.
At Investors Mortgage, we aim to educate our clients on all aspects of the financing process, including common reasons why a refinance could be denied.

Understanding these potential roadblocks allows you to properly prepare your application and finances - or gives you a path forward if you do face rejection. Here are some frequent culprits behind refinance turndowns and how to address them.

Poor Credit or Increased Debts

One of the simplest reasons a lender may reject your refinance application is due to a poor credit score or higher debt levels compared to when you originally secured your mortgage. Lenders will re-assess your creditworthiness, so any negative items or maxed out credit cards can impact approval.

What to do: Obtain updated copies of your credit report and check for any errors or issues that need resolving. Pay down revolving debts as much as possible and hold off on new financing for other major purchases that could inflate your debt-to-income ratio.

Insufficient Home Equity

If home prices have declined in your area, you may get rejected for lacking sufficient equity in your property to qualify for the new loan terms you want. Most lenders look for at least 20% equity remaining to avoid private mortgage insurance requirements.

What to do: Research current home valuations in your neighborhood and be realistic on the revised equity position. Be prepared to contest the valuation with examples of similar home sales if you disagree with the assessment. Worst case scenario, you may need to adjust your loan amount or wait for home prices to rise again before attempting a refinance.

Employment Changes

Lenders like to see stable, consistent income. So if you recently changed jobs or became self-employed, that could lead to requalification issues during underwriting despite having a solid work history previously.

What to do: Be prepared to document your new employment in detail including job description, payslips, income tax returns, and the financial standing of your business. The same applies for your co-borrower.

Financial Discrepancies

Lenders will thoroughly comb through your financial documentation like bank statements, tax returns, debts, and more. Any discrepancies or undisclosed charges compared to what you stated on the application can trigger additional requests or rejections.

What to do: Review all financial paperwork before submitting it to your lender. Having months of bank statements ready that accurately reflect your income sources, assets, and expenditures. Be upfront and prepared to explain unique situations or one-off events. Don’t forget about your buy now and pay later facilities if you have ever applied for one.

While addressing potential hurdles before applying is ideal, sometimes issues don't arise until later in the underwriting process that lead to refinance rejections. If your application does get denied, we will work with you to create an action plan to resolve any problems.

Depending on the circumstances, you may simply need to provide additional documents or explanations to get re-approved. Or it may require actions like paying down more debt, holding your current job longer, or waiting for an increase in home values before reapplying.

The refinancing process requires diligence and responsiveness, but rejections don't necessarily mean your goals are unattainable. With professional guidance, many homeowners are able to overcome denials and get approved for better mortgage terms.

If your refinance application has been rejected, the home loan experts at Investors Mortgage can review your full details and lay out the best path forward based on your individual circumstances. Contact us to schedule a free consultation.