The five things that most often stop a refinance from going through:
- Your home is worth less than your current mortgage (also known as being underwater).
- Your credit score is too low.
- You can’t document your income.
- The lender thinks you’re not making enough money to cover your bills.
- Your home is listed for sale.
You can overcome some of those five issues fairly quickly, but others will take time.
Your owe more on your mortgage than your home is worth
You have three options:
1. Tell the lender you’ll bring cash to the closing table to create a downpayment on the new loan. For example, if your home is worth $100,000 and you owe $110,000 on your existing mortgage, bring the $10,000 difference between what you owe and what your house is worth. Plus, you’ll need to bring the minimum downpayment that the lender requires.
If you’re seeking an FHA loan, add another 3.5%, or $3,500 in this example, to meet FHA’s minimum 3.5% downpayment requirement, suggests finance columnist Jack Guttentag, a professor at the Wharton School. Some loan programs require a 5% minimum downpayment, including FHA loans for more than $625,500.
Although the cash you bring to closing will help build equity, treat it as an expense when you calculate your refinancing costs, and when figuring if refinancing saves you money.
2. Double check the accuracy of the appraisal, and share anything concrete with your lender that the appraiser doesn’t know. Check to make sure the information in the appraisal is correct, such as square footage and number of bedrooms and bathrooms. Note amenities, such as a deck, an extra-large lot, and green improvements, and make sure they’re properly valued.
Guttentag cites the case of a home owner who knew an identical house across the street that sold for a low price because the home owners sold to a family member. The borrower got documentation of why the price was low, the lender ordered a new appraisal, and the refinance went through.
3. See if you qualify for the federal program Making Home Affordable, which helps home owners in your situation, or a program run by your mortgage lender.
Your credit score is too low
These days, the minimum credit score you’ll need to get a mortgage is higher than what was required just a few years ago. It’s possible that even if your credit score hasn’t fallen, it’s now too low for you to refinance the loan you already have.
In general, the lowest acceptable credit score is 620, but many lenders will demand 660 or higher. To get the best rates, you need a 740 or higher, says Keith Gumbinger of HSH.com, one of the nation’s largest publishers of mortgage loan information.
To overcome a low credit score:
- Improve your credit score by paying down credit card debt and paying all bills before they’re due. Avoid credit-repair scams.
- Get an FHA loan. They cost more up front and over the life of the loan, but FHA takes borrowers with weaker credit.
You can’t document your income
Today, lenders make you prove every dime of income you use to qualify for your refinance. To ensure consideration, report all your income to the IRS on your tax returns. You need a two-year income history to refinance.
If you can’t prove your income, apply for a loan from the “Bank of Mom and Dad.” Cash-rich relatives might welcome the chance to earn 4% by giving you a mortgage.
Your lender says you’re not making enough money
Lenders look at your monthly expenses and compare that with your monthly income to come up with debt-to-income ratios. Improve yours by either lowering your debt or increasing your income. Strategies include:
- Borrowing money from family members to pay down your debts.
- Borrowing against your 401(k), if the advantages outweigh the risks for you. The cons are many, including the fact that you’ll pay a 10% early withdrawal penalty if you’re younger than 59 1/2. But it’s often a lower cost of borrowing. So do your homework.
- Going with an FHA loan. FHA allows borrowers to qualify using the income of family members willing to co-sign your mortgage. The family member doesn’t have to own your house, but the person does have to meet the same underwriting requirements as the main borrower (that’s you) does.
Your home is listed for sale
Because it can take months to sell your home in some areas, it’s possible you’ll want to pursue a refinance while your home is on the market. But lenders won’t grant a refinance mortgage while your home is listed for sale. Some lenders will give you a mortgage refinance the day after you take your house off the market, others make you wait 60 days. When you and your REALTOR® discuss taking your house off the market, ask her for a referral to a lender that won’t make you wait 60 days.
If these tactics all fail, try waiting until the latest refinance boom ends and lenders aren’t so busy. “When lenders are scrapping for business, they’re more likely to work with you or take you though manual underwriting,” Guttentag says.