With mortgage interest rates historically lower than low, it is a wonder more people are not refinancing into better mortgage programs and lower rates. Why aren’t people consolidating their built up credit card debt, taking cash out to pay for rising college tuition or simply lowering the term of their mortgages to coincide with their retirement plan?

It is because, they just don’t qualify!

Even if a person was able to qualify for a mortgage when they bought their house, say less than 5 years ago, they might not qualify today. Lender guidelines have gotten so much stricter, and the real estate world has changed so quickly, they nothing is what it was. Here are five reasons why you might not qualify for a mortgage today:

1.    The house is worth less than you currently owe on your mortgage. Even if you put down 20% when you bought your home, it might not be worth now what you paid for it. In fact it may be worth much less and make it impossible to get a new loan. Loan amounts are based on the percentage of the appraised value. Most lenders do not want to refi over 90% of the value of the home and some cap it at 80 percent. You cannot typically get an appraisal until your mortgage is already in the system, so you can’t just get an appraisal first and then begin the mortgage process. . If you are not sure what your home is worth, go online to sites that might give you some comparisons to work with.  Unfortunately, you will have to go through the entire exercise simply to find out your home value does not qualify.

2.    Your credit score is below the threshold.  Lenders now look at two main factors, your credit score and your loan to value based on the appraisal. They literally have a chart that says if your credit score is X and your loan to value is Y, we are going to charge you Z for your interest rate. The lower your credit score and the higher your loan to value, the more of an upcharge you will have. So if you are weak on both of these counts, the interest rate offered might be too high to bother.

3.    Your monthly expenses are too high now. Many people truly abused their credit cards and are now simply paying the minimum. The days of pulling all the equity out of a home to consolidate debt are gone. The lenders have made it very difficult to do a “cash out” refi and pay off debt. They limit both the amount of cash equity allowed to be pulled out and the loan to value threshold for cash out refinances.

4.    Expenses to income ratio requirements are much tighter now. Before the big market death, the average homeowner was paying more than 50% of their gross monthly income on housing alone. After the crash, many borrowers had no choice but to increase credit card balances to make ends meet. By doing this, the monthly overall debt and this percentage really skyrocketed. Obviously, some if not most people are now struggling to make minimum credit card payments. Lenders have lowered the overall ratio to below 45% of the gross monthly debt, some even lower. To boot, if the purpose of the refinance is to consolidate debt and pay it all off with the equity, the ratios are qualified based on the existing debt load, even if it will all be paid off from the mortgage proceeds.

5.    The combined loan to value of mortgages has been decreased. Any second/third mortgage that was taken out after the home was purchased (HELOC) will either need to be subordinated or paid off when refinancing. Many people assume they can pay off and consolidate junior mortgages, but the lender considers them cash out and the rules of #4 above apply. If the numbers do not work and the junior loans need to be subordinated, the loan to value might not work. This if there is a junior lien involved in the refinance process, it gets more complicated and messy and just might not work.

What is the moral of the story? Do your homework first to see if you can even get in the game. When people ask me if there are a lot of refinances going on now, I reply “no, I assume that anybody that could have refinanced did it three years ago”. So, why didn’t you?

To answer the title question, mortgage refinance applications increase as interest rates decrease and many are not closing because of the issues listed above. These applications probably should not have begun at all, but without proper information how does the applicant know they will get knocked out of the box before they even get out of the gate?