Mortgage refinancing: what to do if you've been denied

Refinancing your mortgage, or replacing your existing home loan with a new one, can lower your interest rate and monthly payments or even get you extra cash from the equity in your home.

Not all homeowners are approved for refinancing, though. With home prices and interest rates still high, lenders are careful about who they approve. The rejection rate on mortgage refinance applications increased to 15.5% in 2023 from 9.9% in 2022, according to the Federal Reserve Bank of New York.

If you've been turned down, you still have options for refinancing — and ways to improve your chances next time.

Lenders rely on federal underwriting guidelines from Fannie Mae and Freddie Mac when deciding whether to approve a refinancing application. Some issues are easier for borrowers to address than others.

High debt-to-income ratio

How much of your money is tied up in paying off debts is a major factor in getting approved for refinancing. Your debt-to-income (DTI) ratio is determined by dividing your total monthly debts (including your current mortgage) by your gross monthly income.

A DTI of 35% or less is ideal, according to Experian, although lenders typically will consider a ratio up to 43% for refinancing a conventional mortgage, depending on how strong the rest of their application is.

Low credit score

A credit score of at least 620 is usually needed to secure refinancing, although you may be able to get FHA cash-out refinancing with a score in the 500s.

Low home appraisal

An appraisal of your home's fair market value ensures it hasn't significantly depreciated, especially to the point that it's worth less than what you owe (known as an "underwater mortgage").

If the appraisal indicates your home is in poor condition or has renovations that are not up to code, it could also lead to being turned down.

Not enough home equity

The amount of your home that you own outright is known as home equity. If you put 5% of the cost of the property as a down payment, you're starting with 5% home equity. That amount increases as you make mortgage payments and as the home's value increases. You typically need to own at least 20% of your home outright to refinance your mortgage.

Employment history

According to Fannie Mae's underwriting guidelines, lenders look at an applicant's career history and income over several years. Ideally, they want to see at least two years at your current job, but you probably won't have to worry about a promotion or a better-paying job in the same industry. A consistent income is the key.

Taking a lesser role or lower-paying job and lengthy gaps in employment are more serious red flags, as is changing jobs in the middle of the application process. However, you can always try to explain your circumstances to your lender.

Find out why you were denied

Lenders are legally required to explain why you've been turned down. Find out the reason (or reasons) and if possible, make any necessary changes so you'll be approved next time.

Shop for another lender

You may need a lender that is willing to accept a lower credit score. Rocket Mortgage works with applicants with scores as low as 580, rather than the 620 required by most lenders.

Ally Bank offers cash-out refinances for conventional and jumbo loans, allowing homeowners to convert their home equity into cash and take out a loan that's larger than their current mortgage. Ally doesn't charge application, origination or processing fees and its website has a refinance calculator that provides customized rates without affecting your credit score.

Pay down your existing mortgage

If you didn't put 20% down when you bought your home, you may need to pay off another chunk of your mortgage before you're able to secure refinancing.

Work on your credit

If your credit is the problem, take some time off to raise your score. Focus on making on-time bill payments and lowering your credit utilization ratio, or the amount of available credit you're using. Avoid opening or closing any lines of credit and check your credit reports for any errors.

Experian Boost™ is a free way to improve your credit score. It links utility, phone and streaming service payments to your Experian credit report and uses the You'll get an updated FICO® score delivered to you in real-time.

Look into specialized refinance programs

Borrowers with government-backed mortgages may be eligible for assistance with refinancing.

If you have a Federal Housing Administration (FHA) loan, consider applying for the FHA Streamline refinance program, which reviews borrowers without considering how much home equity they have. 

The Department of Veterans Affairs' Interest Rate Reduction Refinance Loan (IRRRL) can lower the interest on your existing VA home loan, with no appraisal and little to no out-of-pocket costs. According to the VA, even a reduction of half of a percent can save you tens of thousands over the life of your loan.

If your loan is underwritten by Freddie Mac or Fannie Mae, you could be eligible for Freddie Mac's Refi Possible ® or Fannie Mae's ReFi Now programs, which accept homeowners with much higher debt-to-income ratios and guarantee a rate drop of at least 0.50%.

Technically, you can reapply right away, but each application requires a hard credit check, which temporarily lowers your FICO score. So, consider why you were rejected first — if your credit score was too low or you don't have enough home equity, address the issue before applying again.

If you were turned down because of a recent job change, you may have to wait up to two years to reapply.

Whether it's because you've been denied or the rates are still too high, refinancing might not be an option. Fortunately, there are ways you can lower your mortgage payment without refinancing.

Get rid of mortgage insurance

If you have a conventional mortgage, your lender will automatically cancel PMI when you reach 22% equity. You might be able to request cancelation once your equity reaches 20%.

Recast your mortgage

Some lenders will allow you to make a large lump-sum payment toward your principal balance and then re-amortize your loan. The terms remain the same when you recast your mortgage, but the lower balance means smaller monthly payments and an overall decrease in the amount you’ll pay in interest.

Request a loan modification

If you’re facing financial hardship, you can ask to change the terms of your mortgage permanently to help you avoid foreclosure. You can also request a forbearance to temporarily reduce or pause your mortgage, but you'll eventually have to repay the late or suspended payments.

An applicant can be denied refinancing for various reasons, from a low credit score to a new job. If you know why you were turned down, you can work on the problem and reapply.

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*Results will vary. Not all payments are boost-eligible.  Some users may not receive an improved score or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost™. Learn more.