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Mortgage Loan Denied in Underwriting: Why It Happens and What To Do

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No homebuyer wants to hear the words, “Your mortgage loan was denied in underwriting.” Fortunately, it’s unlikely you’ll get this news if your loan was properly preapproved before you found a home. If your home loan application is denied, there are steps you can take to salvage your homebuying chances and fix the issues to flip the underwriting denial to an approval.

Common reasons loans are denied in underwriting

These were the top six reasons for mortgage denials in 2020, according to a report by the National Community Reinvestment Coalition (NCRC):

  • You have too much debt compared to what you earn. Lenders measure your total debt divided by your pretax income to calculate your debt-to-income (DTI) ratio. Although you’ll typically know you don’t meet these guidelines when you apply for a mortgage preapproval, the underwriter may have issues with cosigned debt (even if someone else makes the payments) or recently paid off debt that hasn’t dropped off of your credit report, which could push you over the 43% DTI ratio maximum most lenders prefer.
  • Your credit history or score is unacceptable. This is typically only an issue in underwriting if your credit report expires before closing, and your scores have dropped. It can also become a problem if there’s an error on your credit report regarding the date you completed a bankruptcy or foreclosure.
  • The home’s appraised value or condition doesn’t support the sales price. Underwriters usually only decline a loan for a low appraised value if you can’t haggle for a lower price with the seller and don’t have the funds to come up with the difference. Homes must meet basic safety and health standards and meet basic needs such as plumbing, heating and a weatherproofed shelter. An underwriter might deny a loan for a leaky roof or broken water heater unless it’s fixed before closing.
  • Your application is incomplete or information can’t be verified. Underwriters can’t approve a loan application with missing or unverifiable information. Although this might seem obvious, it was one of the top reasons for loan denial in 2020.
  • You can’t prove your income or employment history is stable. Most loan programs require a two-year history of steady earnings and employment. If your paystubs, tax returns or W-2s show income or employer fluctuations or you’ve switched careers, an underwriter may not feel comfortable approving your application.
  • You can’t verify 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, undocumented cash deposits may trigger a loan rejection.

How undisclosed debt on a mortgage application can cause loan denial

Mortgage lenders have a number of quality control reports they run to check for undisclosed debt on a mortgage application. If they find additional debt at any point in the mortgage process, your approval could turn into a loan denial — or worse, a fraud investigation.

Some examples of undisclosed debt include:

Private mortgages on real estate. If you bought a home from a relative or financed a rental property from a private investor, the loan balance and monthly payment should be disclosed. Lenders check public records nationwide to see if there is any other property titled in your name.

Recent credit applications. Let your lender know if you recently opened a new credit account, even if it doesn’t show up on your credit report. Lenders continue to “refresh” your credit report up to the date of closing, and new debt could result in delays or denial.

Alimony or child support. Even though these debts often don’t appear on your credit report, underwriters check your bank statements and paychecks for signs of regular debt payments like alimony or child support.

Payment arrangements for past-due taxes or judgments. If you’re on a payment plan for past-due IRS taxes or payments related to a judgment, provide all documentation upfront.

6 steps to take if your mortgage is denied in underwriting

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

  1. Talk to your loan officer. Though 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.
  2. Gather all your paperwork. Your lender should be able to provide you with copies of everything you submitted, including all of your income and asset paperwork. You’ll need all of this information for the next step.
  3. Check with other lenders. Just because one lender turns you down doesn’t mean they all will. Some lenders specialize in loans for borrowers with credit and income challenges, or offer “manual underwriting” options that allow them to approve loans other lenders can’t. Provide all of your paperwork and be honest with the lender about the reason for your denial, if you disagree with it.
  4. Write or get letters of explanation. An underwriter may deny a loan simply because they don’t have enough information for an approval. A well-written letter of explanation may clarify gaps in employment, explain a debt that’s paid by someone else or help the underwriter understand a large cash deposit in your account. Provide as much detail as possible to prove you have the ability to repay your loan.
  5. Consider a different mortgage program. Some loan programs set easier qualifying requirements than others. For example, conventional loans require a minimum 620 score for approval, while borrowers may qualify for a loan backed by the Federal Housing Administration (FHA) with a score as low as 500.
  6. Find a cosigner. If your loan is denied because you don’t earn enough to qualify, a cosigner could save the day. FHA loans allow someone who doesn’t live in the home to cosign on a mortgage and contribute their income. They are on the hook for the mortgage if you can’t repay it, and any late payments will appear on their credit.
THINGS YOU SHOULD KNOW

It’s important to understand the difference between a mortgage preapproval and underwriting approval. A preapproval is based on a lender’s preliminary review of your loan application, credit and the initial documents you provide. In most cases, you won’t make it to the underwriting stage if your credit history, income or down payment funds don’t meet the mortgage program’s basic guidelines.

The mortgage underwriting process entails a deeper dive into all the details of your credit, income and savings history, as well as a detailed look at the home you’re purchasing.

How often does an underwriter deny a loan?

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 applications. Home purchases have the lowest denial rates.

The table below shows the home purchase, home equity and home improvement loan and cash-out refinance denial rate by race, according to 2020 HMDA data compiled by the NCRC.

Loan purposeAsianBlackHispanicHawaiian/Pacific IslanderNative AmericanWhite
Purchase8%14%11%10%10%6%
Home equity and home improvement41%56%50%45%49%30%
Cashout refinance and refinance10%17%14%13%16%9%

How to avoid a mortgage loan denial

There are some measures you can take to reduce your chances of a mortgage denial in 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 steps before you fill out a loan application may help boost your score and save you the heartache of a mortgage rejection.

FILL OUT A COMPLETE AND ACCURATE LOAN APPLICATION. 

Whether it’s a prior address or the exact start and end dates of prior employers, taking the extra time to give the lender the most accurate information may reduce the chances of getting denied after preapproval.

DON’T SWITCH JOBS OR CHANGE HOW YOU’RE PAID.

A salaried, full-time job for 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 your closing or flip an approval to a denial.

GET A FULL CREDIT APPROVAL BEFORE YOUR HOUSEHUNT.

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.

HAVE YOUR DOWN PAYMENT IN THE BANK FOR AT LEAST TWO MONTHS BEFORE APPLYING.

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

GET RID OF AS MUCH DEBT AS POSSIBLE.

The less debt you have, the more mortgage borrowing power you’ll accrue. Avoid credit use once you’re preapproved — lenders always reverify your credit before closing.

APPLY FOR THE RIGHT LOAN PROGRAM.

Take time to read up on the minimum mortgage requirements ahead of time so don’t apply for a loan program you have low odds of being approved for. If one lender doesn’t offer the program that’s the best fit, keep searching until you find one that does. In general, loans backed by government agencies such as the FHA, the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) 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 an underwriter thumbs down.

FAQs about mortgage loan denials

According to a 2020 report by the Consumer Financial Protection Bureau (CFPB), FHA borrowers are more likely to be denied for FHA loans than all other loan types: 14.1% of FHA purchase loans and 22.2% of FHA refinance applications were turned down in 2020.

Yes. Many lenders use third-party “loan audit” companies to validate your income, debt and assets again before you sign closing papers. If they discover major changes to your credit, income or cash to close, your loan could be denied.

Lenders don’t keep track of how often borrowers are denied after preapproval, but they do track closing rates, which is the percentage of loan applications that closed within the last 90 days. This may give you an idea of your odds of getting to the closing table. Data collected in the Origination Insights Report through December 2021 shows closing rates based on the loan type and purpose of loan.

Loan program and purposeClosing rate
Conventional refinance79%
Conventional purchase80%
FHA refinance65%
FHA purchase78%
VA refinance72%
VA purchase80%

In many cases, yes. To avoid delays in this process, make sure your employer knows to expect a pre-closing call to verify your employment.

As long as your score meets the minimum credit score requirements for the program you applied for, you won’t be denied. However, your interest rate and costs could go up as a result of the lower score, so check with your loan officer if this happens.

Yes. If you get feedback that the underwriter might be preparing to deny your loan, you can apply with a new lender.

 

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