Common Reasons Why Mortgage Applications Get Denied
How Does Mortgage Underwriting Work?
Mortgage underwriting is the process of verifying and analyzing the financial information you provide your lender. As part of the application, you’ll hand over bank statements, W-2s, and other tax documents, recent pay stubs, and any additional documentation the lender requires. Most lenders use automated underwriting software, such as Desktop Underwriter (DU) or Loan Product Advisor (LPA), to assess your application. These systems don’t allow for much human judgment, instead determining whether you’re approved, rejected, or need additional information.
Reasons for Mortgage Denial
There are many reasons why your mortgage application might be denied, from your credit score to the type of property you’re buying. Here are some common reasons:
1. You Have Credit Issues
Your credit score is a significant factor in determining your mortgage rate and whether you’ll be approved. A credit score of 740 or above is generally considered good, and scores in the “good” range (670-739) are the most desirable. You can qualify for some types of mortgages with lower scores, such as VA loans (620+) or FHA loans (500+). Before applying, check your credit score and report, and dispute any errors. If your score is low, work on boosting it by paying off debt and improving your credit utilization ratio.
2. You Have an Income Shortfall
Your debt-to-income (DTI) ratio, which is the portion of your gross monthly income spent on repaying regular obligations, signals to lenders whether you can handle an additional major debt. Most lenders require a DTI of less than 43%. Some will go up to 50% if you have factors to offset that higher DTI, like a big savings account. Aim for a DTI around 36% or lower.
3. The Loan-to-Value (LTV) Ratio is Too High
Lenders also look at the loan-to-value (LTV) ratio, which is the percentage of the home’s value you’re borrowing. A higher LTV ratio can indicate a higher risk, so lenders may be more cautious. Aim for an LTV ratio of 80% or lower.
4. You’re Trying to Finance an Out-of-Favor Property
Not all homes are created equal, as far as lenders are concerned. The traditional, detached single-family residence still rules, and alternatives can be challenging. Condos, for example, can be tough to finance, and manufactured homes may also face issues.
5. Something Recently Changed in Your Financial Life
The lending process values financial stability and predictability. A recent job change or period of unemployment can throw a wrench in your approval. Large, unusual deposits can also raise red flags.
6. You Don’t Meet the Loan Program’s Requirements
Different types of loans have different specifications. For example, FHA-insured loans have specific appraisals and property conditions, while VA and USDA loans have their own requirements.
7. You’re Missing Information on Your Application
Make sure to fill out the mortgage application in its entirety. If it’s incomplete, the underwriting software might discard your application, resulting in an automated rejection.
What to Do If Your Application is Denied
If you’re denied a mortgage, don’t worry – there are workarounds to many of these issues. You can explore alternative loan options, such as non-QM mortgages or loans backed by the FHA or VA. You can also request manual underwriting, where a human underwriter reviews your application.
Conclusion
The mortgage application process can be full of surprises, but understanding the common reasons for denial can help you prepare. Whether it’s credit score issues, income shortfalls, or property type, being aware of the potential pitfalls can help you navigate the process and find the right loan for your needs.
FAQs
How Long Do Underwriters Take to Approve a Mortgage?
It depends on the lender and the tools they use. On average, it takes about 44 days to close a new-purchase mortgage.
How Worried Should I Be About Underwriting?
Not very. Take steps before applying, like paying down debt and improving your credit score, and you should feel confident when submitting your application. If you’re still nervous, you can explore prequalification before preapproval.
What Should I Not Do During Underwriting?
To avoid a mortgage denied by underwriter teams, avoid making any financial changes and stay responsive. Keep paying your bills on time and don’t open new loans or credit lines, and respond promptly to any requests for additional information.
