Refinancing your home loan can be an attractive option to lower your interest rate, reduce monthly payments, or access equity. However, not everyone who applies for a refinance gets approved. Understanding the common reasons for refinance disqualification can help you avoid potential rejection and improve your chances of a successful application.
What Happens If Refinance Is Denied?
If your refinance application is denied, it may result in a negative listing on your credit file, which could have a temporary impact on your credit score, but it’s not the end of the road.
A denial from one lender does not mean you can’t refinance with other lenders.
At Home Loan Experts, we have several lenders on our panel with flexible credit policies that understand your circumstances.
For now, let’s go through some of the common reasons why lenders may reject your refinance application and possible solutions for the reasons.
Common Reasons Why Refinance Is Denied
- High debt-to-income ratio: A high debt-to-income ratio (DTI) is a red flag to lenders, as it might be an indication of a heavier financial burden. Also, the regulator calls for a DTI of six or less for the banks. DTI is your total debt divided by your annual income.
- Low credit score: A low credit score can signal to lenders that the borrower may be at higher risk.
- Negative equity: If the outstanding loan balance exceeds the current property value, the homeowner has negative equity, and most lenders will deny the application.
- Insufficient income: Lenders want to ensure borrowers have enough income to comfortably manage the new loan. If income is not deemed sufficient, the application may be rejected.
- Irregular repayment history: A history of missed payments or defaults on existing debts may raise concerns for lenders, resulting in a denial.
- Loan-to-Value Ratio (LVR) greater than 80%: Lenders perceive high-LVR loans as riskier because borrowers have less equity in the property. In the event of a property value decline, there is a higher chance that the loan could become “underwater”, where the outstanding loan amount exceeds the property’s value – also known as negative equity.
- Recent poor credit events: Recent bankruptcies, foreclosures, or late payments can damage a borrower’s creditworthiness and lead to a denial.
- Inadequate documentation: Submitting incomplete or inaccurate documentation can lead to a denial, as lenders need comprehensive and accurate information to assess the borrower’s eligibility.
What To Do If Your Refinance Application Is Denied
Now that you know the common reasons why refinancing can be denied, let’s explore some effective solutions to address them.
1. Keep Your Debt-to-Income Ratio In Check
Lenders want to see that you can afford to repay your new loan. So, they will look at your debt-to-income ratio (DTI).
You can calculate your DTI by totalling all your debts and dividing that figure by your annual salary. You can also use Home Loan Experts’ DTI calculator. Aim to reduce existing debts or find ways to boost your income before applying.
Here are some ways you might do that:
- Prioritise paying off high-interest debts: Your high-interest loans or credit cards often accumulate debt the fastest. Try allocating a larger portion of your income to pay off these high-interest debts first, which can decrease your total debt more quickly.
- Consider debt consolidation: Debt consolidation can be a good option if you have multiple debts with high-interest rates. This involves taking out a new loan to pay off your existing debts. The new loan will have a single monthly payment and a lower interest rate, which can save you money in the long run.
- Create a budget and stick to it: A detailed budget can help you understand where your money goes each month. Once you’ve identified non-essential expenses, you might find opportunities to cut back and save more towards paying off your debts.
- Consider a side Job or freelancing: If your primary job allows for it, a side job or freelancing can be an excellent way to boost your income. This extra income can be directed towards reducing your debts.
- Ask for a raise or promotion: If you’ve been at your job for a while and have consistently performed well, it might be time to ask for a raise or seek a promotion. Increasing your income can improve your DTI ratio over time.
- Rent out spare space: If you have extra space in your home, you can consider renting it out on platforms like Airbnb to generate additional income.
2. Mind Your Credit Score
Your credit score is a measure of your creditworthiness. Lenders use your credit score to assess your risk as a borrower.
While a lower credit score might raise concerns among lenders, there are ways to address this challenge directly. Check your credit report and work on improving it. Check for any errors that are hurting your credit rating and get them fixed. Timely bill payments and reduced credit-card balances can work wonders. You can read our page on credit repair here.
Something to note is the number of credit inquiries you make. Hard inquiries can stay on your credit report for up to five years and hurt your credit score. Use free credit reports offered by Credit Reporting Bureaus. Equifax and Experian offer one free report every three months.
Don’t let a low credit score hold you back. Let’s work together to improve your credit rating and achieve your goals! Contact us now at 1300 889 743 or complete our free online assessment form to get started.
3. Building Equity Matters
Equity is the difference between your home’s value and what you owe on the mortgage. Lenders want to see that you have some equity in your home before they will approve refinancing.
Make sure your equity is adequate, or consider making extra mortgage payments. You could also pump up your home’s value through smart renovations like kitchen and bathroom renovations, energy-efficiency upgrades and adding new rooms.
4. A Stable Employment History Helps
Lenders prefer people with steady jobs and consistent incomes. This is because they want to make sure that you will be able to afford the new loan payments.
Frequent job-hopping or employment gaps may make them think twice. Try to maintain a stable work history before making that refinance move.
If you have to change jobs, be sure to have a good reason for the change. This will help lenders understand why you left your previous job.
5. Be On Top Of Your Payment Game
Paying bills on time shows you’re a reliable borrower. To improve your chances, ensure you have a strong payment history by paying bills on time and addressing any past delinquencies.
Some things you can do include:
- Setting up automatic payments, ensuring that your bills are paid on time.
- Paying more than the minimum debt payments each month, so that it’ll be paid off sooner. You’ll also save on interest this way.
- Avoid using credit cards for unnecessary purchases.
- If you are having trouble making a payment, contact your creditor as soon as possible. They may be able to work with you to create a payment plan that you can afford.
6. Lower The Loan-to-Value Ratio
The loan-to-value ratio compares your loan amount to your home’s appraised value.
To improve your chance of refinancing, stay ahead of the game by
- Paying down your mortgage. This will help you pay down your loan faster and improve your LVR.
- Building equity in your home.
7. Don’t Rush Into Refinancing After Bankruptcy Or Foreclosure
Lenders will look at your recent financial history to assess your risk as a borrower.
Recovering from financial setbacks takes time, and the impact of bankruptcy can remain on your credit report for up to five years. Give yourself some time to rebuild your financial foundation before attempting to refinance.
8. Get Your Documentation In Order
Lenders will need to see a number of documents before they can approve a refinance. Gather all the necessary documents like income verification, tax returns, and bank statements. If you are missing any of these documents, it can delay or even derail your refinance application.
Take Action!
Are you considering refinancing your home loan? If so, it’s important to understand the common reasons why refinance applications get denied. We can help you through the process, compare rates and find the best refinance deal for your needs.
Contact us today at 1300 889 743 to learn more about how we can help you refinance your home loan or complete our free online assessment form, and we’ll get back to you right away.