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Securing a mortgage is a crucial step towards homeownership, but the journey is not always smooth. Mortgage denials can be disheartening, but understanding the common reasons behind them is essential for prospective homebuyers to overcome these setbacks.
In this article, we’ll explore how often mortgages are denied, the top reasons for denials and what to do if your mortgage is denied.
How often are mortgages denied?
According to HMDA data, the overall mortgage denial rate was 22.09% in 2022, marking a significant increase from 15.66% in 2021.
Mortgage Loans Denied in Underwriting
During the underwriting process, your financial situation undergoes careful evaluation to determine your eligibility for a mortgage loan. Your mortgage may be denied for a number of reasons that range in severity.
Here’s a look at some of the top 10 reasons for mortgage loan denial:
|% of Mortgage Denials (2022)
|1. Debt-to-income ratio
|2. Credit history
|3. 2 or more reasons
|5. Incomplete credit application
|6. Unverifiable information
|7. Insufficient cash
|9. Employment history
|10. Mortgage insurance denied
If your mortgage is denied during underwriting, you may want to ask your lender about manual underwriting. Unlike automated underwriting systems, manual underwriting involves a more in-depth assessment of your financial history and capabilities.
While it may be a lengthier process, manual underwriting can provide an opportunity for a more nuanced evaluation, potentially addressing concerns that led to your initial denial.
» MORE: See today’s refinance rates
Mortgage Loans Denied at Closing
Even if your mortgage is approved during underwriting, you may encounter obstacles at closing. Before you close on your mortgage, your underwriter will conduct a final review of your financial situation to ensure you still meet the criteria for your desired loan amount.
Common reasons you could be denied at closing typically involve changes in your financial circumstances, including:
Mortgage Loans Denied After Preapproval
- Employment: Significant changes in employment status, such as job loss, a job switch or reduced working hours.
- Credit: Actions impacting your credit, such as opening a new line of credit or incurring hard credit inquiries.
- Purchases: Acquiring substantial items or financing purchases, particularly big-ticket items.
You may be surprised to learn that your mortgage application can be denied, whether during underwriting or at closing, even if you were initially preapproved for a loan.
Common reasons your mortgage could be denied after preapproval are often similar to those encountered during the closing phase. This further emphasizes the importance of maintaining a stable financial profile throughout your homebuying journey.
What to do if Your Mortgage is Denied
If your initial mortgage application is denied, don’t lose hope. There are several steps you can take to increase your chances of approval:
1. Review your mortgage denial letter
A mortgage denial letter, also known as a mortgage rejection letter or adverse action letter, is a written notice from a lender to a borrower indicating that their mortgage application has been rejected. The letter should clearly state the reasons why the mortgage was denied.
This could be due to factors such as credit history, income, employment status, debt-to-income ratio or other financial considerations. If the denial is based on your credit report, the letter may include details about your credit score and specific factors that negatively impact your creditworthiness.
It’s important to carefully review the reasons for your mortgage denial and take steps to address any issues before considering a new mortgage application.
2. Improve your credit
You can order one of each of your three credit reports, maintained by the credit bureaus TransUnion, Equifax and Experian, at no cost once a year from AnnualCreditReport.com.
These reports will list your open credit accounts, including any car loans, student loans and credit card accounts you are paying off. They will also list late payments or negative judgments like bankruptcies or foreclosures.
Once you receive them, first look at each report for errors or discrepancies. If you do spot an error, such as a missed payment that you know you made on time, correct it by email or phone. Erasing an error can provide a quick boost to your credit score.
Lenders today consider a FICO credit score of 740 or higher to be an excellent one. If your score is too low, generally 640 or below, lenders will hesitate to approve your loan request.
Your credit score rises or falls based on a number of factors. Certain missed or late payments will cause your score to drop if you are at least 30 days late. Your score will also fall if you build up too much credit card debt or undergo bankruptcy or foreclosure.
To steadily improve your score, pay all your bills on time and eliminate as much of your credit card debt as you can. Refrain from closing credit accounts if you pay them off, as this can actually hurt your credit score.
Don’t expect to boost your credit score quickly. Depending on how low your score is, it can take months, or even years, to improve your score by enough to ease the concerns of mortgage lenders.
3. Pay off debts
Paying down your debt is another way to boost your chances of qualifying for a mortgage loan on your second attempt. Lenders typically want your total monthly debts to equal no more than 43% of your gross monthly income. If you can reduce your monthly debt load, you might be able to improve your debt-to-income ratio enough to qualify for a loan.
For example, say you are sending $300 a month to your auto lender. If you can pay off your car loan before you apply for a mortgage, that $300 will be subtracted from your total monthly debts. The more monthly payments you eliminate or reduce, the better your chances of snagging that mortgage loan.
4. Save for a larger down payment
Consider saving for a larger down payment, as this can increase your chances of approval. A higher down payment reduces your loan amount and positions you as a less risky borrower in the eyes of your lender.
If you’ve already exhausted your savings as a source of funding, there are other methods to raise cash for a down payment. Consider looking into sources of gift funds, selling some of your assets or researching government assistance programs to see if you qualify.
If you still aren’t able to make a substantial down payment, you may be able to qualify for some types of mortgages with $0 down.
5. Consider a government-backed loan
|Denial Rate (2022)
Compare the qualification criteria, including minimum credit score and debt-to-income ratio requirements, for different loan types to see if any government-backed options will suit your mortgage needs.
6. Try other mortgage lenders
If your mortgage is denied, one potential solution is to switch mortgage lenders. You may find that some lenders are more flexible than others.
Big banks tend to be fairly rigid. They generally set their loan requirements and overlays according to corporate policy, and loan officers have little room to vary from them. Smaller banks and credit unions, however, often have less restrictive guidelines and may loosen certain requirements if they see other aspects that give them confidence that the loan will be sound.
If you’re having trouble finding a lender who’ll approve you for a mortgage, you might consider seeking the services of a mortgage broker. Brokers work with numerous lenders and specialize in matching a borrower’s needs to the right lender. You do pay a higher premium for their services than you would if you arranged for the same loan yourself, but for borrowers with unique needs, it can be well worth it.