Why Your Mortgage Application Might Be Denied

Low credit scores and high debt-to-income ratios are common reasons

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If you're like most people, chances are you'll need to take out a mortgage to buy a home. In April 2021, only 15% of homes were bought with cash alone.

Getting a mortgage isn't always easy, though. On average, around 7% to 14% of mortgage applications have been denied from 2018 to 2020 depending on the type of mortgage. Here are some common reasons your mortgage application might be denied, and what you can do to prevent it. 

Key Takeaways

  • Around 7% to 14% of mortgage applications were denied in 2018 to 2020.
  • Your loan might be denied for several reasons: your credit is too low, your debt-to-income ratio is too high, the property appraised below the sales price, etc.
  • Lenders aren't allowed to deny your loan based on your age, gender, race, color, nation of origin, or because of the fact that you receive public assistance. 

What Happens in Mortgage Underwriting

In order to make a decision about whether to approve or decline your mortgage application, lenders take a close look at your financial situation and the home you want to buy. This process is called "underwriting," and it's split up into a few stages. 

The first part of underwriting happens when you apply for a mortgage pre-approval. This involves handing over most of the documents they'll look at in regards to your finances, such as:

  • Pay stubs
  • W-2 forms
  • Tax returns and bank statements from the last two years
  • Documents of any other income sources, such as alimony or Social Security income

Getting a preapproval can happen as soon as the same day, but it can generally take up to 10 days. After that, you're prepared to find a home. Once you do, the next stage of underwriting—the loan closing—begins. This is where the lender looks at the home itself and re-checks your finances before granting final approval. Loan closing took an average of 49 days in December of 2021, according to Ellie Mae.

How Often Are Mortgages Denied?

In 2020, about 9% of all mortgages were denied. This can vary by the type of mortgage program. For example, the denial rate for FHA mortgages—which are often targeted toward those who have a harder time qualifying for a mortgage in general—was higher, at 14%.

Reasons Your Mortgage Application May Be Denied

There are several reasons why your mortgage might be denied. Here are some of the more common ones:

Your Credit Score Is Too Low

Your credit score is often one of the first things lenders consider. In some cases, it represents a pass/fail decision right off the bat. Many mortgage programs have a minimum credit score, and if your score is too low, you may need to work on improving your credit score

Here are the minimum credit scores for the most popular loan programs:

  • VA loan: No official minimum score, but in practice, 620 or higher is often required
  • FHA loan: 500
  • USDA loan: No official minimum score, but in practice, 640 or higher is often required
  • Conventional loan: 620

Your Debt-to-Income Ratio Is Too High

Lenders want to make sure you can afford your mortgage. To measure this, they look at your debt-to-income ratio, or DTI. It's a measure of all of your monthly debt payments, divided by your total monthly income. If your DTI ratio is above the minimum requirements (i.e., too much of your income is going toward debt each month), you might want to focus on paying down debt first.

Here are the minimum DTI requirements for different mortgages:

  • VA loan: 41%
  • FHA loan: 43%
  • USDA loan: 41%
  • Conventional loan: 36%-50% (based on underwriting) 

The Property Appraisal Was Too Low

Lenders generally only approve mortgages for up to the value of the home and won’t extend huge mortgages for homes that aren't worth it. This is an especially important point in today's housing market, where bidding wars often push up the sales price of homes beyond what it's actually worth. 

If the home appraisal comes back below what you agreed to pay, you have a few options. If you can afford it, you can pay the difference in cash. You can also negotiate a lower sales price with the seller, if they're willing. If neither of these options work, your lender might not approve your loan and you may have to walk away. 

You Recently Changed Jobs 

Lenders also like to see that your job is stable. While each lender might differ in what they call "stable," it's safe to say that if you just changed jobs, it might be a good idea to reach out to potential lenders to see what they require. 

If you're self-employed, however, things may be a bit tougher. Most lenders want to see stable income over the past two years, so if you've recently made the leap, you may need to provide additional documentation in order to get the nod. 

The Property Has Problems

Some mortgage programs have certain requirements for the property you wish to buy. These tend to be more common with government-backed mortgages like FHA loans or VA loans. The reason behind these rules is that they want to make sure you're buying a home that's livable. 

Lenders will send out home inspectors to make sure that the house meets the loan criteria; if it doesn't, it might mean that repairs need to be done or you’ll have to walk away from the home. 

You Took Out New Credit

Lenders base their decisions on your current credit score. If it goes up, that's not generally a problem. But if it goes down at all before you close on the loan, it could be grounds for denying your application. 

One of the most common reasons it might decrease is if you applied for new credit, which usually lowers your credit score by a few points. It's best to wait to apply for any new credit until after your loan is approved.

Reasons Your Lender Can’t Deny Your Mortgage

Lenders can deny your mortgage for many different reasons, but there are also reasons why they can't deny your mortgage:

  • Age
  • Gender
  • Race
  • Religion
  • Marital status
  • Nation of origin
  • If you receive public assistance

It's unlikely a lender would come out and say you're denied for one of the reasons above. But if you think that likely was the reason for your denial, you can get help from your state Attorney General's office.

Frequently Asked Questions (FAQs)

What happens if your mortgage loan is denied?

If your mortgage application is denied you can request an explanation from the lender, which they are legally required to give you. They're also required to disclose the credit score on which they based their decision. You can use this information to correct the problem or apply with another lender.

Can my mortgage loan be denied at closing?

Yes. If your circumstances have changed, such as if you've just lost your job or have taken a big hit to your credit, it's possible that your loan could be denied at the very last minute.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. National Association of Realtors. “All-Cash Sales Are Rising Sharply Amid Intense Buyer Competition.”

  2. Consumer Financial Protection Bureau. “Data Point: 2020 Mortgage Market Activity and Trends.”

  3. Consumer Financial Protection Bureau. “Create a Loan Application Packet.”

  4. Bank of America. “​​Two Smart Homebuying Moves: Mortgage Prequalification and Pre-approval.”

  5. ICE Mortgage Technology. “​​Origination Insight Report: December 2021.”

  6. Consumer Financial Protection Bureau. “Data Point: 2020 Mortgage Market Activity and Trends,” Page 27.

  7. U.S. Department of Veterans Affairs. “​​VA Guaranteed Loan,” Page 2.

  8. Department of Housing and Urban Development. “Mortgagee Letter 10-29,” Page 2.

  9. FDIC. “Single-Family Housing Direct Loans.”

  10. U.S. Department of Veterans Affairs.”Debt-to-Income Ratio: Does it Make Any Difference to VA Loans?”

  11.  U.S. Department of Housing and Urban Development. “Section F. Borrower Qualifying Ratios,” Page 4.

  12. USDA Rural Development. “Chapter 11: Ratio Analysis.”

  13. Fannie Mae. “Selling Guide.”

  14. Consumer Financial Protection Bureau. “What Happens When a Mortgage Lender Checks my Credit?”

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