Mortgage denied? Learn why it happens and what you can do
Common reasons mortgages are denied
- Poor credit
- Inconsistent income
- Insufficient income or assets
- Insufficient down payment
- Property issues
Finding the perfect home only to have your mortgage loan denied can be devastating.
Fortunately, the road does not end with a rejection. Each lender and mortgage has different underwriting requirements, so a denial for one doesn’t mean a denial for all. Identify where you can improve your application to close the loan.
Preapproval identifies potential problems
There are two major variables that could make your loan fall through: your personal profile or the home you intend to buy.
Getting preapproved prior to house-hunting can help you identify any issues with your personal finances that could prevent you from getting a loan. Lenders will pull your credit score, verify your income and give you an idea of how much home you can afford. Although preapproval is not a guarantee to lend, it is a strong, positive assurance.
Reasons for denial
Say you skip preapproval, apply directly for a mortgage on a specific property and are denied. Lenders are required by law to provide you with a disclosure letter outlining why your application was rejected. Common reasons for loan denial include:
If you are rejected on the basis of poor credit, you can work to boost your score and try again later. Ensure all your bills are paid punctually and that you are working to paying down debt. Strengthening your credit score is a slow process, however. If time is of the essence, consider a lender who works with borrowers with weaker credit profiles. Remember that you will pay a higher interest rate for the risk.
Lenders want to be certain that you are capable of repaying your loan, and typically require two years of stable income as an indication of your solvency. If you have a spotty job history, you may need to wait until you’ve worked consistently before applying for a mortgage. Freelancers and self-employed individuals will need to provide even further detail of their income and work history. Having a strong credit score and large down payment may help boost the case.
The lender may deny your mortgage if your income or assets are too low to support the loan amount you seek. An excessively high debt-to-income ratio is also a red flag. As significantly increasing your income in a short amount of time is likely not possible, consider a less expensive home that is more in line with your finances.
Borrowers no longer need a hard 20 percent down payment to qualify for a loan. That said, if your down payment is small relative to the amount of money you intend to borrow, lenders may find this risk unacceptable. Take time to save for a larger down payment, look for a less-expensive home or consider a lower down payment loan backed by the Federal Housing Administration (FHA).
Other issues in your personal history could affect your mortgage approval. For example, unpaid tax liens, unpaid alimony or child support, or complications with a divorce that leaves your ex-spouse with a claim to some of your assets.
Denial after preapproval
In some situations, your mortgage can fall through even after you were preapproved. This is typically due to a change in the borrower profile or if there is some major concern about the home you are looking to buy.
Losing your job can put the brakes on a mortgage approval. Changing jobs – even for a higher-paid position – can also jeopardize your financing.
Credit score drops
Negative changes to your credit score due to late payments or new debt incurred can cause your loan to fall through. Avoid taking out any new loans or putting big purchases on your credit card while your mortgage approval is pending.
Even with a perfect borrower profile, problems with the home can nullify your loan. Examples include the home appraisal coming in lower than expected, the homeowners association not passing lender requirements, another party having title to the property, the home not qualifying for insurance or a business being run on the premises.
Reapply or try new lender
If you are unable to address the issue that led to your loan rejection, consider strengthening other elements of your application. Underwriting is like a complex set of scales: boosting certain factors can offset others. For example, if your income is slightly too low for your loan amount but you have good credit and more money to put toward a down payment, the boost in initial equity could be enough to convince the lender to approve your mortgage.
This will not work for major problems with your finances or if there is an issue with the property itself. In these cases, you may need to seek a different lender, consider a different home or take the time to improve your financial situation.