Mortgage Application was Denied

You applied for your home mortgage and you application was denied – Now what?

Whatever the reason your application was denied – there are steps you can take to get back on the path to homeownership. First, contact your lender to find out why your mortgage application was denied.

After denying your mortgage application, lenders are legally required to provide you with a written explanation for their decision if you ask for one. Known as an Adverse Action letter – the explanation includes the following:

  • Why you were refused credit
  • Which of the three nationwide consumer reporting agencies sourced your credit report
  • Access to a free credit report for your review

Having this information is crucial if you wish to apply for another mortgage in the future. Once you learn why you were denied, you will know how you can begin working on your financial profile to make yourself a more appealing borrower. If your mortgage application has been rejected, you may be unsure of what steps to take next.


The good thing is that a mortgage denial does not have to mean the end of your homeownership dreams.

Common reasons mortgage applications are denied:

  • Incomplete loan application or information cannot be verified

    Incomplete loan application or information cannot be verified


    Underwriters are not able to approve a loan application with missing or unverifiable information.

  • Borrower is unable to verify required funds for down payment and closing costs

    Borrower is unable to verify required funds for down payment and closing costs


    Lenders must verify the source of funds used for the down payment and closing costs. 


    Large, undocumented cash deposits may trigger a loan rejection.

  • Borrower is unable to prove income or employment history

    Borrower is unable to prove income or employment history


    Most loan programs require a two-year history of employment and steady earnings.


    For example: If paystubs, W-2’s or tax returns  show income or employment fluctuations, or career changes, an underwriter may not feel comfortable approving the loan application.

  • High debt-to-income (DTI) ratio

    High debt-to-income (DTI) ratio


    Your DTI ratio, expressed as a percentage, is the total amount of debt payments you owe every month divided by your gross monthly income. In a lender’s eyes, the higher your DTI ratio, the more likely you will run into trouble making mortgage payments. Most lenders prefer a DTI ratio around 40% or less. Therefore, if you are already carrying a high level of debt relative to your income, that could be a red flag for lenders.

  • High loan-to-value (LTV) ratio

    High loan-to-value (LTV) ratio


    Your LTV ratio compares the amount of the mortgage you are seeking to the appraised value of the property you are attempting to buy. It also considers any amount of money you have set aside for your down payment. In general, a lower LTV ratio makes you appear less risky to lenders. If your LTV ratio is too high, meaning you are requesting for a mortgage that is close to the value of your desired property, lenders may deny the request.

  • Low credit scores

    Low credit scores


    Your mortgage lender uses your credit scores as one of the factors in determining your trustworthiness as a borrower. The lower your credit scores are, the less confidence a lender is likely to have in your ability to repay the loan.

  • Credit history or credit score is unacceptable

    Credit history or credit score is unacceptable


    This issue can arise if the credit report expires prior to closing and the lender obtains another credit report and the credit scores have dropped since first applying for the loan. 


    Also note that even if the credit report has not expired, lenders will usually obtain a new report just prior to closing to ensure nothing has drastically changed on the credit profile, such as: any new debt or increased credit balances.


    Another issue can be the date when a Bankruptcy or Foreclosure were completed and whether the date is the actual dismissal date or if it was incorrectly reported.

  • Fluctuations in income and changes to employment status

    Fluctuations in income and changes to employment status


    Changes in income may change your DTI ratio and signal instability. Lenders generally prefer mortgage applicants to have held a salaried, full-time position at their company for two years or more. If you recently changed jobs or have a history of doing so, this may affect your mortgage application.

  • An increase in interest rates

    An increase in interest rates


    If interest rates increase during the mortgage application process, the loan itself may become more expensive. This could suddenly push the mortgage out of your financial reach, especially without a corresponding increase in your income.

  • Appraisal value or property condition does not support the sales price

    Appraisal value or property condition does not support the sales price


    If the appraisal value of the property comes in lower than the agreed upon sales price, and the borrower lacks the funds to cover the difference (or is unwilling to cover the difference), and the seller is unwilling to lower the price to the appraised value, then the underwriter will have to decline the loan.

  • How undisclosed debt on a mortgage application can cause loan denial

    How undisclosed debt on a mortgage application can cause loan denial


    Mortgage lenders have various quality control procedures to check for undisclosed debt on a mortgage application.


    If the lender finds additional debt at any point in the underwriting process, the approval could turn into a loan denial – or worse, a fraud investigation.


    Some examples of undisclosed debt include:


    Private mortgages on real estate

    If the borrower purchased a home from a relative or financed a rental property from a private investor, then the loan balance and monthly mortgage payment should be disclosed in the loan application. 

    Lenders will search nationwide public records to see if there are any other properties titled in the borrower’s name(s).


    Recent credit applications

    If the borrower has recently opened a new credit account, it’s important to let the lender know.

    Lenders continue to “refresh” the credit report up until the date of closing, and new debt could result in delays or denial at the last minute.


    Alimony or child support payments

    Even though these debts do not often appear on a credit report, underwriters will review bank statements and paycheck stubs for signs of regular debt payments such as alimony or child support.


    Payment arrangements for past-due taxes or judgments

    If a borrower is on a payment plan for past-due IRS taxes or payments related to a judgment, or other settlement, it is advisable to provide all related documentation to the lender up-front.

  • Reducing the chances of your loan being denied

    Reducing the chances of your loan being denied


    To improve the chances of your loan application being approved and reducing the changes of having the loan denied – be sure to take the following steps:


    Reduce as much debt as possible

    The less debt you have, the better it is by having a lower debt-ratio, therefore allowing you to qualify for a larger loan amount.  It is advisable to avoid the use of credit cards while the loan is in process.


    Improve your credit or repair credit any issues prior to applying for your loan

    Paying off or paying down your maxed out credit cards will improve your credit score.

    Do not apply for any new credit.

    Have incorrect information on your credit report corrected as soon as possible.

    If you have co-signed for an auto loan, it’s best to refinance the loan out of your name.


    Do not change jobs

    Lenders will verify your employment up until the day your loan is scheduled to close and a job change prior to your closing could delay the closing or worse yet, the underwriter can change your loan approval to a DENIAL.


    Have your down payment funds in the bank for at least 2 months prior to applying for your loan

    Most lenders will require funds to be seasoned in a bank account for at least 2 months.

    For cash on hand – it is best to deposit it in your bank account a few months prior to applying for your  loan. 


    Work with an experienced loan officer

    Discuss loan your options and provide all required documentation and pertinent information to your loan officer so that he/she can best structure the loan package for submission to a lender for underwriting and to maximize the odds of your loan being approved.


    Submit a fully completed and accurate loan application

    Take your time to fully complete the loan application.


    For example:


    • Do not omit any information on the application such as other properties you own or any new debt that has not yet shown up on your credit report.
    • Provide accurate prior addresses.
    • Provide the exact starting date of your current employment.
    • Provide the exact starting and ending dates of your previous employment.

    By taking the extra time in providing the lender the most accurate information and all information, will reduce the chances of your loan being denied after preapproval.


    Apply for the right loan program

    Your loan officer will inform you about the available loan programs and down payment options.

    Some of the most common loan programs are: Conventional, FHA, VA, USDA.

    (Government backed loans such as: FHA, VA and USDA have more lenient guidelines, therefore making them easier to qualify for than Conventional loans.)


    Loan programs offer different minimum down payment options:


    • Conventional – 3%
    • FHA – 3.5%
    • VA – 0%
    • USDA (loans for rural areas) – 0%

    Apply for the maximum loan amount you can qualify for

    When getting pre-approved for your loan, keep in mind that besides the mortgage payment, the lender will include the property taxes, property insurance, mortgage insurance (if required) and HOA (Homeowner Association) fees (if required), in calculating your qualifying Debt-to-income (DTI) ratio. 


    Depending on the type of property you wish to purchase and whether it is a single-family residence, condominium, townhouse, or the property is in a planned unit development (PUD), the HOA fees can very substantially. Therefore, if the property to be purchased ends up being one which has a high HOA fee, this will greatly affect your debt-ratio, so it is wise to take this into consideration when deciding on the loan amount to request.


    Obtain a full credit approval prior to starting the home search process

    Many lenders offer full credit approvals which allow you to have your income, credit and assets fully vetted by an underwriter prior to starting your search for a home.

  • Steps to take if your mortgage loan is denied

    Steps to take if your mortgage loan is denied


    If your loan is denied – take the following steps:


    Talk to your loan officer

    The underwriter may inform your loan officer that your loan is likely to be denied for one reason or another.  Therefore, although you cannot usually speak directly to an underwriter, your loan officer should be able to give you a clear reason for your loan denial. 


    If the loan is being denied due to something which can be addressed on your end, then you will have a short time period to try to resolve the item in question and to try and get the denial overturned. 

    The denial does not become official until the lender issues a denial letter, after which, you will need to start the loan process again in the future.


    Write or obtain letters of explanation

    An underwriter may deny a loan due to not having enough information in the loan file for approval.

    A well-written letter of explanation may help to clarify employment gaps, explain a credit account that has just been recently paid in full, but not yet reported on your credit profile.

    Or perhaps, helping the underwriter understand a large cash deposit into your bank account.

    Provide as much detail as possible to prove you have the ability to repay your loan.


    Find a co-borrower

    If your loan is denied due to not enough income to qualify for the loan amount you are seeking, a co-borrower could save the day.


    FHA rules allow a co-borrower or cosigner to apply alongside the borrower. Having a co-borrower or cosigner may improve the FHA loan applicant's chances of getting approved for the mortgage.

    The lender will take the co-borrower’s income as well as all of the co-borrower’s debt into consideration to see if the loan can be approved.


    Note: The co-borrower will also be responsible for the mortgage and if you are not able to repay it, or have any late payments, all will appear on their credit. 


    Consider a different mortgage program

    Some loan programs such as FHA, set easier qualifying requirements than others.


    For example:

    Conventional loans require a minimum 620 credit score for approval, while borrowers can qualify for a FHA (Federal Housing Administration) loan with a credit score of 580 with 3.5% down payment. 


    If you are able to increase your down payment to at least 10 percent, you can have a credit score as low as 500 and still qualify.


    Check with other lenders

    Just because one lender turns you down does not mean all lenders will turn you down.

    Some lenders specialize in loans for borrowers with credit and income challenges or offer “manual underwriting” options which allow them to approve loans that other lenders can’t.


    Be prepared to provide all of your paperwork and be honest with the lender about the reason for your denial if you disagree with it.

Two things to know - It is important to understand the difference between a mortgage Pre-approval and Underwriting approval.

Pre-approval is based on the lender’s preliminary review of a loan application, credit, and the initial documents that a borrower provides. In most cases the loan file will not make it to the underwriting stage if credit history, income, or down payment funds do not meet the mortgage program’s basic guidelines.

Underwriting approval process entails a deeper look into all the details of the credit profile, income, employment history, assets, as well as a detailed look at the property to be purchased.