In this article:
- How Often Do Mortgages Get Denied?
- Reasons Your Mortgage Could Be Denied
- How to Avoid Mortgage Loan Denial
- What to Do if Your Mortgage Application Is Denied
No homebuyer wants to hear that their mortgage application has been denied. While it's relatively uncommon, it does happen. But getting denied by your mortgage lender doesn't necessarily mean you've reached the end of the line. Depending on the reason, it may still be possible to get a home loan. Being aware of signs your mortgage application will be denied can be a good place to start. Here are seven reasons it could happen.
How Often Do Mortgages Get Denied?
In 2022, the mortgage denial rate was 9.1%, according to the Consumer Financial Protection Bureau (CFPB). Most lenders recommend getting preapproved for a mortgage before making an offer and formally applying, which could help you avoid rejection. The preapproval process, which is similar to applying for a mortgage, can help clarify your buying power. It takes the following details into account:
- Your credit
- Your income and employment
- Your assets
- Your debts and expenses
If there's a potential snag, it should come up during the preapproval process—but this isn't always the case.
Reasons Your Mortgage Could Be Denied
1. There's an Error in the Paperwork
A simple clerical error, like missing a digit of your Social Security number, could lead to a denial. The same goes for important information you may have left out, such as a previous bankruptcy, though the mortgage lender should catch this type of error during the preapproval process.
2. Your Income Has Changed
If your income has declined since you were preapproved, that could hurt you when you apply for a mortgage. Lenders want reassurance that you have steady, reliable income to make your future loan payments. Recently getting laid off or changing jobs could create a roadblock.
3. Your Credit Score Has Decreased
Lenders typically require a minimum credit score of 620 to qualify for a conventional mortgage, though some loans have lower thresholds. You could qualify for an FHA loan, which is insured by the Federal Housing Administration, with a score as low as 500 if you make a 10% down payment. Still, a score reduction could be a red flag to the lender.
Your credit score could be negatively affected if:
- You've taken on new debt. Applying for new credit can temporarily ding your credit score. It can also increase your debt-to-income ratio (DTI), which shows lenders how much of your monthly income is going toward debt payments. You'll likely need a DTI that's less than 43% to qualify for a mortgage, but many lenders set the bar at 36%.
- You've missed a debt payment. Failing to pay your bills could damage your credit and make lenders wonder if you're experiencing financial stress. A late payment can stay on your credit report for up to seven years, though its negative impact will lessen over time.
- You've closed a credit account. Closing out an old credit card will reduce your available credit—and bump up your credit utilization ratio. This is the percentage of your available credit you're currently using, and a higher utilization can hurt credit scores. Keeping it below 30% is important, and in the single digits for the best scores. Keep in mind, card issuers might close your account due to inactivity, which also reduces your credit limits and could reduce your score.
- One of your credit limits has decreased. This will also increase your credit utilization ratio. A credit card issuer may decrease your limit if there's been a change in your buying behavior.
- There are inaccuracies on your credit report. That can include fraudulent activity. The good news is that you have the right to dispute inaccurate information and have it removed from your credit report.
Learn more >> Why Did My Credit Score Drop?
4. Your Down Payment Is Low
Having an insufficient down payment is one of the possible signs your mortgage will be denied. A low down payment means you'll have to finance a larger percentage of the sale, which could put off lenders. Down payment requirements vary based on loan type. It's possible to get a conventional loan with as little as 3% down, and an FHA loan with 3.5%. VA loans and USDA loans require no down payment.
5. The Home Appraisal Is Low
Most lenders will require an appraisal after you've made an offer on a home. If that appraisal puts the home value below the mortgage amount, the lender will not approve the full amount—and the homebuyer may have to come up with extra cash to cover the difference. This is to protect the lender. Otherwise, they could lose money if the homeowner stops paying their mortgage and the house goes into foreclosure.
6. You Have Unverified Cash Deposits
You can expect the lender to take a deep dive into your finances to make sure you can afford the mortgage payments. If they come across large cash deposits, chances are you'll need to verify them. That usually involves:
- Documenting the source
- Disclosing the reason behind the deposit
- Clarifying if it's a loan you'll need to repay
Having unsubstantiated cash deposits could cause a lender to deny your mortgage application.
7. You Increase Your Debt
Even if it doesn't have a significant effect on your credit score, taking out more credit or adding a large purchase to your credit card after getting preapproved for a mortgage could be a red flag to lenders. If possible, in the months leading up to applying for a mortgage, avoid applying for new credit or making large purchases (unless you can pay cash and it won't reduce your down payment).
Learn more >> Will a New Credit Card Affect My Mortgage Application?
How to Avoid Mortgage Loan Denial
- Check your credit score and take steps to improve your credit if necessary.
- Double-check your paperwork for errors.
- If possible, hold off on making a career change until after your mortgage is finalized.
- Make sure you have an adequate down payment for the type of loan you're seeking.
- Be ready to verify cash deposits.
- Avoid taking on new debt, applying for new credit or closing credit accounts.
- Pay all your bills on time—your payment history is the most important factor that determines your credit score.
Learn more >> How to Get Your Credit Ready for a Mortgage
What to Do if Your Mortgage Application Is Denied
- Understand why. If you request an explanation for why your mortgage application was denied, the lender is required to provide one in writing. This can help guide your next steps.
- See if you qualify for another type of mortgage. An FHA loan could be a good fit if you're a first-time homebuyer. Compared to a conventional loan, it may be easier to qualify for this type of government-backed mortgage.
- Take time to improve your credit. You might consider pausing your house hunt while you improve your credit. Paying down debt, bringing any past-due payments current and limiting new credit applications can all help.
- Consider down payment assistance. Grants, tax credits and other types of down payment assistance could help you get approved for a mortgage. Check what programs are available in your area and if you qualify.
- Look for a different home. If your application was denied due to a low appraisal or a sale price that didn't gel with your budget, it could be a blessing in disguise. Going with a more affordable home might increase your odds of getting approved.
The Bottom Line
If you're in the market for a new home, you'll want to be aware of potential signs your mortgage will be denied. Communicating with your lender can help. Even if you do run into an issue, it may still be possible to get approved for a home loan. Maintaining healthy credit is one of the most important things you can do. You can monitor your credit for free with Experian.
