Signs Your Mortgage Will Be Denied in Underwriting

No homebuyer wants to hear the words, “Mortgage loan denied in underwriting.” The good news? A denial doesn’t have to be the end of the road for obtaining a mortgage. By understanding the warning signs your mortgage will be denied, you can take the right steps to get your homebuying journey back on track.

Key takeaways

• Common reasons for mortgage denial include missing information on your loan application and not meeting minimum mortgage requirements.
• If your loan is denied in underwriting, you can double-check your paperwork, talk to your lender, explore other loan programs or find a cosigner.
• You can avoid a mortgage denial by improving your credit, keeping steady employment and working with an experienced loan officer.

7 signs your mortgage will be denied

1. Your debt has increased

If you’ve taken on new debt during the loan closing process, it can impact your debt-to-income (DTI) ratio — a key factor lenders use to measure how your income compares to your debts. Lenders use the DTI ratio to assess whether you can afford the mortgage payments on a loan. Applying for new credit can push you over the 43% DTI ratio maximum preferred by most lenders.

2. Your credit score has dropped

This is typically only an issue in underwriting if your credit report expires before closing and your score has decreased. It can also become a problem if there’s an error on your credit report regarding the date you completed a bankruptcy or foreclosure. It’s a good idea to monitor your credit during the closing process to nip any potential issues in the bud.

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3. The home appraisal comes back lower than expected

Lenders typically require a home appraisal during the home closing process to confirm the home’s value isn’t less than the loan amount. Underwriters usually decline a loan for a low appraised value only if you can’t negotiate a lower price or don’t have the funds to cover the difference.

4. Your application is incomplete or information can’t be verified

Underwriters can’t approve a loan application with missing or unverifiable information. It’s important to fill out your loan paperwork thoroughly and promptly respond to any requests for additional information.

5. Your income or employment situation has changed

Most loan programs require a two-year history of steady earnings and employment. If your pay stubs, tax returns or W-2s show income or employer fluctuations or you’ve switched careers, an underwriter may not feel comfortable approving your application.

6. You can’t verify source of funds for your down payment or closing costs

Lenders must verify the source of money you use toward your down payment and closing costs. Large cash deposits without documentation may raise red flags and trigger a loan rejection.

7. You have undisclosed debt

Mortgage lenders run several quality control reports to uncover any debt not disclosed on your mortgage application. If they find additional debt during the mortgage process, your approval could turn into a loan denial — or worse, trigger a fraud investigation. Some examples of undisclosed debt are alimony, child support and recent credit applications.

How often do mortgages get denied in underwriting?

The overall denial rate for home purchase applications was 9.4% in 2023, according to the most recent report from the Consumer Financial Protection Bureau (CFPB). Your chances of experiencing a mortgage denial can be higher or lower, depending on your loan type. Here are the denial rates for different types of loans in 2023:

• Conventional loans: 7.9%
• FHA loans: 13.6%
• USDA loans: 13.7%

According to recent data collected about mortgage lending activities by the Home Mortgage Disclosure Act (HMDA), loan denials are more common on home equity loans, home improvement loans and refinance mortgage applications. Home purchase loans tend to have the lowest denial rates.

What to do if your mortgage application is denied

If your loan is denied, take the following steps before giving up on your home purchase:

• Talk to your loan officer. While you can’t usually speak directly to an underwriter, your loan officer should give you a clear reason for the denial. You’ll have a short time to try to overturn the denial — it doesn’t become official until the lender issues a denial letter.
• Gather all your paperwork. Your lender should be able to provide copies of everything you submitted, including your income and asset paperwork. You’ll need all this paperwork for the next step.
• Check with other lenders. Just because one lender turns you down doesn’t mean others will. Some lenders specialize in loans for borrowers with credit and income challenges, and some offer “manual underwriting” options, which allow them to approve loans that other lenders can’t. Provide all your paperwork and be honest with the lender about the reason for your denial, especially if you disagree with it.
• Write or get letters of explanation. An underwriter may deny a loan simply because they don’t have enough information for approval. A well-written letter of explanation can clarify gaps in employment, explain a debt paid by someone else, or help the underwriter understand a large cash deposit in your account. Be as detailed as possible to prove your ability to repay the loan.
• Consider a different mortgage program. Some loan programs have easier qualifying requirements than others. For example, conventional loans require a minimum 620 score for approval, while borrowers may qualify for a Federal Housing Administration (FHA) loan with a score as low as 500.
• Find a cosigner. If your loan is denied because you don’t qualify based on your earnings, a cosigner could help. FHA loans allow someone who doesn’t live in the home to cosign on a mortgage and contribute their income. The cosigner is responsible for the mortgage if you can’t repay it, and any late payments will affect their credit.

How to avoid a mortgage loan denial

You can take steps to reduce your chances of a mortgage denial during underwriting.

Repair your credit before you apply

Whether it’s paying off maxed-out credit cards or refinancing out of a cosigned car loan, taking these actions before submitting a loan application can help boost your credit score and save you the stress of a mortgage rejection.

Fill out a complete and accurate loan application

Providing your lender with accurate details, such as prior addresses or the exact start and end dates of past employment, can help reduce the chances of denial after preapproval.

Don’t switch jobs or change how you get paid

Having a full-time, salaried job for at least two years gives you the highest odds of approval when it comes to income. Lenders verify your employment up to and including the day of your closing, and a job change before closing could delay the sale or turn an approval into a denial.

Get a full credit approval before you house hunt

Many lenders offer full credit approvals that allow you to have your income, credit and assets fully vetted by an underwriter before you find a home. This type of credit approval can make last-minute denials less likely.

Have your down payment in your bank account at least two months before applying

Most lenders require two months of bank statements to prove you have the funds for a down payment. If you have a stash of cash, deposit it a few months before your loan application.

Pay down as much debt as possible

The less debt you accrue, the more borrowing power you’ll have. Avoid applying for new credit once you’re preapproved for a mortgage — lenders always re-check your credit before closing.

Apply for the right loan program

Take time to research the minimum mortgage requirements ahead of time so you don’t apply for a mortgage with low odds of approval. If one lender doesn’t offer the program that’s the best fit, keep searching for one that does. Generally, loans backed by government agencies such as the FHA, the U.S. Department of Veterans Affairs (VA loans) and the U.S. Department of Agriculture (USDA loans) are easier to qualify for than conventional loans.

Work with an experienced loan officer

Loan officers with decades of experience often know how to present a difficult credit or income history to an underwriter to maximize your odds of success.

Don’t apply for the maximum mortgage loan amount you qualify for

When you get preapproved for a home loan, lenders usually estimate your property taxes, insurance and HOA fees. If you don’t leave enough wiggle room in your DTI ratio for a higher-than-expected property tax bill or pricey HOA dues on the home you ultimately choose, it could lead to a thumbs down from an underwriter.