Refinancing your mortgage can be a great way to take advantage of lower interest rates and decrease your monthly payment by hundreds of dollars. The drawback is that the process is time consuming, and for those who've had their application denied once already, it can be devastating.
Mortgage experts say that depending on the reason for your denial, it might be in your best interest to dust yourself off and try again.
"Just because you're turned down by one of the top five banks doesn't mean a smaller institution won't be able to offer you a loan," says Jason Auerbach, divisional manager with New Jersey-based First Choice Loan Services, Inc. "You just have to find the right lender."
That's because, he explains, every bank has its own overlays, or certain rules and regulations about the parameters on which they can make loans. The good news is that in general, lenders' guidelines are getting back to normal after the housing market crisis, says Doug Lebda, LendingTree.com founder and CEO. The situation for many years was that lenders were making their underwriting standards even tighter than Freddie Mac and Fannie Mae guidelines, he says.
"Since the market is normalizing, lenders are willing to take some more appropriate risks, and credit is definitely loosening a little bit," Lebda says.
In other words, with rates still low and improvements to the housing market underway, you might want to give refinancing your home a second thought. Here are your next steps for getting back in the game.
Step 1: Knowing is half the battle
If you've been denied, lenders will have to give you a general sense as to why, says Auerbach.
"You might want to ask your loan officer for as many details as possible," he says. "The more information you give to your new loan officer, the better off you're going to be."
It will ultimately save you time since the new potential lender will have a good sense of your situation, and can offer the right programs to you accordingly.
Step 2: Make credit score improvements if necessary
One big reason people get denied for refinancing is their credit score, says Tim Lucas, editor of MyMortgageInsider.com. "Many lenders have a minimum of 640 or even 660 for some loan types. Another lender could allow a 620 score. Asking a very specific question -- 'What's your minimum credit score?' -- can yield a lender that would take the refinance," he explains.
Start by checking your free credit score to see where you stand as of now. If you're still falling short, you should take some time to repair your credit by paying off debts and correcting any errors on your credit report.
"The best way to make sure you can qualify for the lower refinance rates is to improve your credit score," says Lebda.
Step 3: Seek out unique programs that may better suit your situation
For so-called underwater borrowers who owe more than their home is worth, the Home Affordable Refinance Program (HARP) can be a solution. However, there is some disparity in the way lenders offer this program, says Lucas.
"True HARP rules say there's no percentage limit to how much your new loan can be compared to your value. But some lenders allow the loan up to 150 percent of value, some lenders allow 200 percent," he says.
If not having enough home equity was the reason for your denial, it's worth checking around to find a lender that is more flexible in this area.
Step 4: Understand how income is interpreted
Another reason for denial is not showing enough income. Some lenders limit your new house payment to 43 percent of your gross income, says Lucas, so if a homeowner is at 43.1 percent, the loan is denied. A frank phone conversation can help borderline applicants get approved, he says.
Also, some lenders may look at income very differently, says Auerbach. For instance, if the way you earn money is nontraditional (such as self-employment or trust income), different banks might not accept that income position.
Step 5: Do some comparison shopping
Sites like WisePiggy.com help people comparison shop loan options and get quotes from potential lenders. While that's a great starting point, you should also take it upon yourself to make some calls, says Lucas.
"Finding a more lenient lender is just a matter of getting on the phone and asking really specific questions that address the issues that caused a previous denial," he says. "Each lender has a slightly different specialty and takes risks where others don't."
In addition, you might consider contacting a mortgage broker.
"Sometimes a bank has pretty limited options when it comes to loan offerings," says Lucas, "but a mortgage broker will have access to five to 10 banks that may accept a specific situation."
Finally, talk to friends, family and trusted financial advisers like your accountant for their referrals.
Step 6: Stay on top of paperwork
While the paperwork back and forth can be a headache, if you don't delay, you might be able to use some of what you already compiled.
"Most paperwork that you supply is good for 90 days," says Auerbach. "If you supplied a pay stub on May 1, as of Aug. 1, that document will have expired," he says.
As far as the appraisal goes, you should be aware that generally every institution will order their own.
Although it can seem like a lot of work to go through a second time, don't give up on your refinancing efforts unless there is a major obstacle toward qualifying that can't be overcome. By doing some refinancing research and speaking with those who are knowledgeable about the specific programs available, you could end up qualifying for the best mortgage rates and making a dent in your monthly expenses. Once you do, you'll see that the time and effort will have been well worth it.