Crying, screaming, begging or pulling out your hair won't move that cold-hearted banker if she is in intent on denying you a chance to refinance your mortgage. In reality, it was more likely a hard-wired computer that made the decision based on your credit history, income, debt level, home appraisal and amount of equity in your home. You could try another lender, but the answer will probably still be no. Your first step is to figure out why you got the dreaded "no," and what you can do to turn that negative into a positive.
Ask and You Shall Receive
Ask the lender why the application was rejected. There might be one reason, or a variety of reasons. It could be as simple as the loan amount you requested was more than the value of your home. The real estate market fluctuates. In a time long, long ago, lenders used to lend up to 90 percent of the appraised value of the home, but not so much anymore. You'll be fortunate to receive 80 percent.
Your credit report will likely tell you all kinds of things about why you were denied a refinance. Obtain copies from all three credit bureaus -- Experian, Equifax and TransUnion -- for both you and your spouse. Your credit could be stellar while your significant other's is so-so. Both scores count. Review every account. Request corrections for any accounts that are closed but are still shown as open; accounts that aren't yours; errors in amounts owed; and late payments that weren't late.
A good rule of thumb to calculate the maximum amount for an allowable mortgage payment is 28 percent of your gross income. Remember: That's before Uncle Sam snags his share. Make sure all income is counted, including child support, alimony, royalties or a second job. If only one of you is working -- perhaps you're a student, while your wife works -- consider getting a job yourself, even if it's part-time. This will improve your chances of getting your mortgage refinanced.
Another thing to keep in mind is that banks apply a penalty against those who are self-employed. Not fair, but there it is. Apparently, working for someone else supposedly means your job (and therefore, your paycheck) is more reliable. If you really want the refinancing to be approved, you might have to leave your self-employment behind and get a job with an established company.
All of your debts -- including your car payment, credit cards and personal loans, and mortgage payment -- should not total more than 36 percent of your gross income. Either pay down the debt, or increase your income. Just don't close the accounts that have been paid off. The amount of available credit to used credit is included in the calculation of your credit score.
Home Appraisal and Equity
If you're concerned that your home appraisal is not accurate, look at comparable homes in the area to see if your appraisal is in line with what has actually sold. Look at the sold prices -- not the asking prices of houses that are still for sale. Calculate the price per-square-foot so you can get a more accurate number for your own home. Just bear in mind that there are no points for upkeep and beauty here. Your home might be the most attRactive and best maintained in the neighborhood, but its value is calculated on an average per-square-foot basis plus increases for amenities such as a pool.
The odds are you won't be able to change the appraisal. The appraisal affects the amount of equity as a percentage. For example, if the loan amount is $250,000 and the appraised value is $275,000, that equals equity of $25,000, or 9 percent. Lenders want a minimum of 20 percent equity. So if you are looking to refinance, the loan amount would have to be lowered to $220,000 (assuming an appraised value of $275,000); or the appraisal increased to $312,000 (assuming a loan amount of $250,000).
Last But Not Least: Assets
In addition to your home, lenders look at your assets. Liquid assets, such as mutual funds, stocks and bonds, are more important than assets that would have to be sold, such as jewelry, big boy toys, or season tickets to your favorite pro sports team. If the only asset you have is the passbook savings account from when you were in grammar school, you might have to start saving.
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