What Can Hurt My Chances of Refinancing?

A home's physical condition is a significant part of its value.
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Refinancing your mortgage may save you money over the life of the loan. While reasons for refinancing vary by person, a common reason for refinancing is to get a new loan with better terms, such as a lower interest rate. If you want to refinance, you need to meet lender requirements for approval.

Lower House Value

You may have trouble refinancing if your home's value has dropped. Lenders won't refinance your loan if you don't have enough equity. Equity is the percentage of the home's value you own free of any other liens, such as your current mortgage. How much equity you need depends on the refinance type and lender requirements. You need at least 5 percent equity if you're just changing the loan's terms. You'll need more equity, usually over 10 percent, if you want money back from the new loan, commonly called a "cash-out" refinance.

Credit or Payment Problems

The refinancing lender will look at your credit history and credit score. You may have trouble refinancing the loan if you have poor credit because you're considered a higher risk. If you have credit trouble and do find a lender willing to refinance your loan, the new terms may be less favorable than your current loan's terms.

The refinancing lender will give special weight to one area of your credit report: your current mortgage. You may have trouble refinancing if you're frequently late in making your mortgage payments, even if you make all other payments on time.

A Second Mortgage

If you've involving a second mortgage loan in the refinance process, such as a refinance with a loan consolidation, the lender's requirements for a "cash-out" loan may apply, even if you're not getting money back. Your refinancing lender and the second mortgage lender must come to an agreement regarding loan priority even if you're not doing anything with your second mortgage during the refinance.

Home loan priority -- which determines which loan gets first dibs on any money that would come from auctioning off your home should you default on the mortgage -- is usually determined by age of the loan. Since your second loan is older than your refinanced loan, the second loan will have legal priority over the refinanced loan. But your first mortgage was probably for more money than your second mortgage, and your refinanced loan amount will be higher than what you owe on your second mortgage. Your refinancing lender won't want the larger refinanced loan behind your smaller second loan in terms of legal priority for recouping money from a foreclosure.

Previous Refinance or Move

Lenders have internal guidelines regarding frequent loan refinances. You may not qualify for another refinance if you've refinanced recently, such as in the last six months.

Your primary home mortgage is often easier to refinance than a loan covering an investment property or second home. If you've moved, you may have to meet higher credit and equity requirements to refinance a loan covering a property you no longer live in.

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