Is it easier to qualify for a new mortgage if your new loan is smaller than your current mortgage?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

In general it is easier to qualify for a new mortgage if it is smaller than your current loan balance but there are several points that affect the answer to your question.  If you personal or financial situation has changed since you obtained your original mortgage it may actually be more difficult to get approved for your new loan.

The first point to understand is that mortgage process starts over when you apply for a new loan.  You are required to submit a new application and provide current information about your income, assets, debts, credit profile and employment status.  So if you experienced a change in your credit score, debt-to-income ratio, job history or other qualification factor, this can impact your ability to qualify for the loan.

For example, if your credit score decreased, your monthly gross income declined or you incurred a significant amount of additional debt, it may be more difficult for you to qualify for a new mortgage, regardless of the loan amount.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford

Additionally, a change or a break in your employment may also make it more challenging to get approved. Specifically, if you changed from being an hourly or salary employee that receives a W-2 to being self-employed or a contract employee who receives a 1099, you may be required to wait one-to-two years before you can qualify.

The lender also orders a new appraisal report to determine the maximum loan amount you are eligible for based on your current property value.  If the appraised value of your home has decreased significantly due to issues with your specific property or a general decline in home prices, this can make it more challenging to qualify for the loan you want.

This is why it is important to understand your estimated property value as well as the lender's maximum loan-to-value (LTV) ratio before you apply for a mortgage.  You want to make sure that you have sufficient equity in your home to meet the lender's requirements even if your loan amount is smaller.

The final point to keep in mind is that if mortgage rates have increased since you obtained your original mortgage, it may be more challenging to qualify for a new loan.  Paying a higher rate increases your monthly payment, although reducing your loan amount can offset this increase.     

While it is important to keep these considerations in mind, we should highlight that if your in your personal situation, property value and loan terms remain relatively consistent or have improved, then it should be easier to qualify for a new mortgage with a lower loan amount. Simply put, having a smaller mortgage reduces your monthly payment, which makes the loan more affordable.  

We always recommend that you contact multiple lenders in the table below to understand how they would handle your unique situation.  Comparing lenders enables you to confirm qualification requirements and to find the best loan terms.

Sources

"B3-6-02, Debt-to-Income Ratios."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.