5 Common Mortgage Refinance Obstacles
With rates at historic lows and home values improving, many homeowners want to take advantage of refinancing their home. There are many reasons advantage of a mortgage refinance, the top being to save money. But just because rates are low does not mean you will be eligible to refinance. Here are 5 common obstacles that keep homeowners from refinancing.
Obstacles in Refinancing Your Home:
1 – Not Enough Equity
The most common obstacle in refinancing your home is not having enough equity in the property. All refinance loans maximum loan to value requirements. If the balance on your current mortgage exceeds the maximum loan to value guidelines you will not qualify for a mortgage refinance.
Solution: Unfortunately there is no quick fix to this problem, and it is largely out of your hands. If you are looking to reduce your interest rate you can pay extra on your mortgage to bring down the principal balance. Otherwise, you’ll need to wait until values rise high enough to refinance the property.
2 – Poor Credit
When you apply for a mortgage refinance, lenders will check your credit report. If you have a low credit score and poor credit history you most likely will not be approved for a mortgage refinance. Even if you have paid your current mortgage on time,; having other delinquent lines of credit will most likely result in denial. Poor credit is a sign of financial struggles or irresponsibility to lenders.
Solution: The good news is that you can rebuild your credit report. There are several ways to improve your credit score and your chances of being approved for a mortgage refinance. To learn more about improving your credit read our article, How to Improve Your Credit History.
3 – Bad mortgage payment history
Similar to the situation above, you may be denied for a mortgage refinance due to a poor payment history on your current mortgage. A lender will question your ability to pay your current mortgage and won’t want to take the risk of owning your mortgage loan.
Solution: Start making all of your mortgage payments on time. Clean up any unresolved issues on your credit and give your credit report a few years to improve. After time has passed with positive payment history you can apply to refinance, but be prepared to explain what caused the past mortgage delinquencies.
4 – High Debt to Income Ratio
Having a debt to income ratio that exceeds mortgage application guidelines can result in a denied refinance application. Even though your new payment may be lower than your current mortgage payment, it does not mean you’ll be approved. The lender who will be refinancing your property may not want to take on the risk of a loan with a high debt to income ratio.
Solution: Luckily, there are many ways to lower your debt to income ratio including paying down your current debt and increasing your income. To get an in depth look at paying down your debt to income ratio check out the article, Ways to Lower Your Debt to Income Ratio.
5- You no longer occupy the property
Refinancing a property that is no longer a primary residence can be a major obstacle for refinancing. The new loan will need to be an investment loan, and a refinance may not be in your best interest. Investment property loans often have higher interest rates, lower loan to value ratios and higher cash reserve requirements.
Solution: Homeowners have two options in this situation, either refinance the home before they move out of it, or do lots of research and find a reasonable investment property option.
Before submitting an application consider whether or not you will face these mortgage refinance obstacles. Do whatever you can to fix any problems so your mortgage refinance will result in a better loan with lots of savings.