If you follow the real estate market, you probably already know that mortgage interest rates are at impressive lows. In fact, they’ve dropped a full percentage point since they reached a seven-year high in November 2018.
With that in mind, many homeowners have tried their best to save money by applying to refinance their home loans. However, according to a new study by LendingTree, on average, approximately 25% of those who have tried to refinance ultimately had their applications denied.
In their study, LendingTree used the latest Home Mortgage Disclosure Act (HMDA) data for 2018 to come up with the 25% denial rate, but it seems like that number is historically on target, at least for recent years.
LendingTree’s Chief Economist, Tendayi Kapfidze, was kind enough to provide added context for the numbers. Between 2014-2018, the denial rate has hovered between 24% to 30% each year.
Why do applications get denied?
According to the study, there were four main reasons why applications were denied in 2018. They were as follows:
- A too-high debt-to-income ratio (26.1%)
- An unacceptable credit history (24.3%)
- An incomplete application (17%)
- Bad collateral (16%)
What can you do to increase your chances of getting approved?
Given those reasons for denial, there are a few things that you can do to increase your chances of getting an approval. Follow these tips to ensure that your financials are in the best shape possible when you go to refinance.
Talk to a lender: If you’re worried about your application being approved, the first thing to do is to talk to a lender. He or she can help you look at the specifics of your financial situation in order to see what can be improved before you apply to refinance.
Pay down your debts: As the name suggests, your debt-to-income ratio (DTI) is a measure if the money that you have coming in each month versus what goes out to pay off your debts. Ideally, lenders look for a ratio of 36% or less in order to approve you for a new loan. If your current ratio is too high, focus on either generating more income or paying down some of your debts.
Examine your credit report for errors: Everyone is entitled to one free credit report per year from each of the credit bureaus. If you have a question about your score, visit AnnualCreditReport.com to get copies of your reports. Then, look them over and be sure to dispute any errors.
Check your loan-to-value ratio (LTV): When the report talks about “bad collateral,” it’s essentially referring to your loan-to-value ratio (LTV), or the percentage of any loans you’ve taken out on your home in comparison to its current value. When you go to refinance, lenders look for an LTV below 80%. If yours is higher than that, think about waiting until you’ve paid off more of your current loan or applying for a lower loan amount.
Verify that the information you’ve provided is correct: Plus, you will also want to make sure that you have the necessary documentation to back it up.