When your offer on your dream home is accepted, your loan application moves on to the Underwriting milestone . At this point, the Underwriting team will review your application and related financial documents and issue either an approval, a conditional approval, or a denial; about 8% of loan applicants will receive the dreaded denial letter. There’s no way around it: being denied for a mortgage can be hugely disappointing, especially if it occurs at this point in the process.
What is a Mortgage Denial?
A mortgage denial occurs when the Underwriting team determines that your financials do not meet the requirements for the loan you are applying for and reject lending to you. While there are some loan programs with more flexible guidelines than others, all loan programs are subject to denial.
Whenever a mortgage application is denied, the lender is legally obligated to send a written letter that details the reasons for denial. Once a denial is issued, there is no other remedial action you can take with that lender. Instead, your best bet is to either correct the issues that caused the denial or simply try again with a different lender. While there is no mandatory waiting period to apply again for a loan after denial, it may be a good idea to take some time before re-applying as multiple credit pulls outside of a 45-day period can have a slight negative affect on your credit score.
Mortgage Denial Reasons
These are the most common reasons a loan application would be denied by the Underwriting Team:
- Low credit score or delinquencies on your credit report
- Inconsistent job history
- High debt-to-income ratio
- Property issues
- Lower than expected appraisal
Low Credit Score or Delinquencies on Your Credit Report
Your credit score and credit history is one of the most significant factors that will be evaluated when you apply for a mortgage as a low credit score would indicate you are a high-risk investment. Within the mortgage industry, the following categorization of credit scores is generally accepted:
A credit score of 740 or higher is considered Excellent.
A credit score between 700 and 739 is considered Good.
A credit score between 630 and 699 is considered Fair.
A credit score below 629 is considered Poor.
Most lenders will consider a credit score that is Fair or better, however a credit score that is below 630 usually won’t be able to qualify for a conventional loan program. Lenders also look at the details within your credit report, and any past accounts that were sent to collections or past bankruptcies could also cause your loan to be denied, despite a good credit score.
To avoid having your credit report cause any issues with your loan application, you should request your credit report be sent to you prior to applying for a loan. Review your credit report thoroughly to make sure it’s accurate (you would probably be shocked to find out how many credit reports contain at least one error) and be sure to dispute any inaccuracies you come across. Once you have applied for a loan, it’s incredibly important to work on maintaining your credit score – meaning continue to make on-time payments, don’t increase the balance on your credit cards, and don’t apply for any new credit.
Inconsistent Job History
When a lender analyses your credit and financial history, they want to see stability and consistent income. If you’ve recently lost a job within the past two years, a lender will see that gap in income as a red flag. Even if you have since found a new job, new jobs are seen as less stable than longer held jobs – you may not be the right fit at this company and they could let you go, or you could dislike the job and quit. Additionally, if a decent portion of your income comes from outside of your regular salary, like bonuses for example, you may need to provide a longer history of your income.
If you changed jobs recently without a gap in income, you could still qualify for a loan, but it may be a good idea to provide your lender with a letter from your employer reiterating your salary and position. You should keep in mind that switching into a job in a new field can also be seen as a red flag to lenders.
High Debt-to-Income Ratio
Your debt-to-income ratio, or DTI, is determined by the percentage of your gross monthly income that is allocated to debt payments. Most lenders won’t lend to someone with a DTI over 43% with the mortgage payment included. However, portfolio loan programs may be available to you if your DTI is higher than the traditional mortgage cut-off.
Property Issues
If the home you are looking to purchase has an inspection performed that comes back with some major structural or “unseen” problems, it’s possible that your loan will be denied. Some government loan programs will enforce minimum property standards for a loan to be approved, and certain lenders may have these kinds of requirements generally for them to approve your loan.
Lower Than Expected Appraisal
Your lender will not lend more money than the value of the home as they want to be sure that selling the property will be enough to pay off the mortgage. If your appraisal comes back lower than expected, you may have to pay the difference out-of-pocket or negotiate with the seller to lower the selling price. If you’re not able to do either of these things, it’s likely that your mortgage will be denied.
Will a Mortgage Denial Affect My Credit Score?
The short and quick answer here is no, a mortgage denial does not affect your credit score. Lenders do not notify credit reporting agencies about whether your loan application was accepted or denied. This information is not outlined in your credit report.
However, there are a few things to keep in mind if you have had an application denied recently and are looking to apply again with another lender. When you submit a mortgage application, the lender will “pull your credit”, meaning they request a credit report from the three major credit bureaus: Equifax, Experion, and TransUnion. When a mortgage lender pulls your credit, it is considered a “hard” inquiry, which can have a slight negative effect on your credit score. Both “hard” and “soft” (soft inquiries have no effect on your credit score) credit inquiries appear on your credit report – although they do disappear after two years. If a lender sees that you have had multiple “hard” credit inquiries on your report and no new credit accounts added, this could indicate to the lender that you have applied for credit and been denied multiple times, raising red flags.
While your credit report does not explicitly indicate if you have been denied a mortgage, it’s possible that lenders could extrapolate from the information that is on your credit report that you have been denied in the past and deny your application on these grounds.
What to Do After a Denial
When your loan application is denied, you will receive a denial letter from your lender that explains why you were denied. It’s important to read this letter and assess the issues outlined so you can remedy them and re-apply with hopefully a better result.
Let’s take the above listed reasons for a mortgage denial and break down how each can be remedied for the next time you apply for a mortgage.
Low Credit Score or Delinquencies on Your Credit Report
First and foremost, if a reason for your denial was your credit score or delinquencies on your credit report, you MUST take the time to thoroughly review your credit report for any errors and dispute them. If everything on your credit report looks correct, then your next course of action is to work to improve your credit score.
Unfortunately, as with many things in life, there is no quick fix for this. Make sure you pay all your bills on time and pay down any debts you may have. If you are carrying a credit card balance over month after month, try to lower or completely eliminate that balance so you’re carrying little to no debt on your credit cards. This is, of course, easier said than done, but if you’re able to make that change, your credit score will thank you for it. If you think you’ll need some help raising your credit score, ask your loan officer to refer you to a reputable credit repair company.
Another option you may have is to apply for a different loan program. Government-backed loan programs like FHA and USDA have more flexible guidelines and allow for lower credit scores. Talk to your loan officer about your options here.
Inconsistent Job History
If a shaky job history was a reason for denial, the only thing you really can do is continue working and bringing in stable income until you can demonstrate consistent income for 2 years. As with raising your credit score, there are no quick fixes or secret tips here.
High Debt-to-Income Ratio
If you have a high debt-to-income ratio, even with good credit, that caused your mortgage denial, you’ll need to focus on paying down your debts. As much as you can, begin allocating your income towards paying more than the minimum payments on your credit cards, auto loan payments, or student debt payments. The less debt you have, the lower your DTI.
Property Issues & Lower Than Expected Appraisal
In the case of property issues or a lower appraisal holding you back from approval, your best bet here is to simply find a new property to bid on that is hopefully in better condition or has an appraised value that better aligns with its selling price. Additionally, you could try applying for a different loan program that has less strict property guidelines.
One Last Tip
If you’ve been denied by one lender, it doesn’t mean you will be denied by all lenders. Some lenders have stricter underwriting guidelines to adhere to, while others can cater to people who may fit into more niche employment or income categories.
Don’t be hesitant to shop around, but keep in mind the 45-day “hard” credit pull rule: you can have multiple lenders pull your credit in a 45-day period and have it only count as one “hard” credit pull on your credit report. However, once you are outside of that 45-day period, an additional credit pull from a lender will slightly ding your credit score – but the 45-day period will begin again.
If you’ve been denied a mortgage in the past, it certainly doesn’t mean all is lost. Assess your reasons for denial and take some time to remedy those issues or try applying for a new loan program or applying with a new lender. If you need help improving your credit score, be sure to ask your loan officer to refer you to a reputable credit repair company. With some effort, you can improve your financial situation and apply for a mortgage again. You may find this time your end result is much more favorable!
Learn more about mortgage denials
Can a Mortgage Denial Destroy Your Credit Score?
Disputing Errors on Your Credit Report
