Why won't lenders approve my refinance to avoid default risk?

Posted by  on Mar 21, 2012

I'd like to refinance my mortgage and have applied with several mortgage lenders. However, I've been unemployed twice in the last two years because the local economy is pretty bad, and I've been told that it caused my refinance mortgage application to be turned down. Why? Shouldn't lenders want to cut my payments and make me a less-risky borrower?

The hot potato

You'd think so, but that's not the way it works in most cases. If you refinance with a new lender, it's not lowering default risk; it's adding a long-shot loan to its portfolio that wasn't there before. Kind of like playing Hot Potato--no one wants to be holding it when you lose another job.


Even a refinance with your current lender might not be feasible. That's because the majority of mortgages in the country are sold to investors and the payments are collected by servicing companies. So, if your original lender has offloaded your mortgage to someone else and drawn a sigh of relief, it isn't going to be eager to get it back.

Santa Claus doesn't work here

Finally, even if your mortgage is still with its original lender and there are no mortgage servicing companies or investors involved, you may not get approved for a refinance. That's because mortgage lenders are very busy processing all the refinance applications that flow in when the best mortgage rates get crazy-low. They aren't exactly eager to divert their resources to help you exchange a loan at a higher-than-market rate for one at today's lowest mortgage rates.

Not to HARP on this, but…

Yes, Reagan once said that, "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'" But there is nothing scary about the Home Affordable Refinance Program, or HARP. Recent changes to its guidelines mean more people than before will qualify for a refinance. If your mortgage is owned or serviced by Fannie Mae or Freddie Mac (Use the Loan Lookup to see), you may be able to refinance through HARP and your job changes won't matter.

  • You must be current on your mortgage at the time of the refinance with a good payment history over the last twelve months.
  • The current loan-to-value (LTV) ratio must be greater than 80 percent.

Guess what? You don't have to use your current lender! Compare rates and costs with mortgage companies online to find the best refinance terms.


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