If you’re preparing for major home upgrades or paying off major debt, you may be considering refinancing your home with a second mortgage. This means letting lenders poke around in your finances again, inquiring about other assets, savings, and investments. While refinancing can be an exciting financial move, it’s important to be aware of potential roadblocks that could lead to your application being declined. Here are five critical reasons why your second mortgage could face a setback:

Detrimental Debt

Lenders will always look closely at your Debt-to-Income (DTI) ratio, which compares your monthly debt payments to your income. If your debt load is already substantial, it could be a red flag. Lenders prefer a DTI below 43%, so exceeding this limit will likely decrease your chances. Tackle existing debt before applying for a second mortgage, to significantly improve your approval odds.

Credit Concerns

Your credit history speaks volumes to lenders, and a poor track record can raise concerns. Beware of actions lenders interpret as red flags, such as recent credit inquiries, high outstanding debt, or new large purchases. Personal loans and poor payment habits can also catch negative attention. Take the time to address these issues and enhance your creditworthiness before submitting your second mortgage application.

Not Enough Equity

A declining real estate market can impact the value of your home and affect the equity you’ve built up so far. Lenders usually require a minimum amount of equity to approve a second mortgage. If your property’s value has decreased, you might not meet this baseline. Stay on top of your home’s value, as well as local real estate trends, to be sure you are making moves at the right time.

Constant Closing Costs

While you are understandably focused on the loan itself, don’t forget that you are responsible for closing costs on a second mortgage, too. If you can’t afford these expenses, it can lead to a denied application. Research and budget for these costs in advance, to ensure you have an adequate financial plan that covers all of the expenses involved.

Income Instability

Lenders seek stable and consistent income when evaluating mortgage applications. If you’ve recently changed jobs or your income has been inconsistent, it could create doubts about your ability to repay. Demonstrating a steady income history and a reliable employment record assures lenders that you can pay back the loan with consistency.

Securing a second mortgage involves careful planning and preparation. Addressing these potential stumbling blocks will help increase your chances of a successful application. If you’re unsure about your eligibility, consider consulting a financial advisor or real estate professional to guide you through the process.