Getting turned down for a mortgage can feel pretty disappointing, especially when you’re excited about buying your dream home. The good news? You’re definitely not alone, and there are clear steps you can take to turn things around.
While lenders can’t reject your application based on things like your age, gender, religion, race, marital status, or where you’re from, plenty of other factors can influence their decision. Let’s walk through what might cause a denial and, more importantly, what you can do about it.
How Common Are Mortgage Denials?
Here’s some perspective: According to the Consumer Financial Protection Bureau, about 9.3% of mortgage applications were denied in 2020, which was slightly up from 8.9% the year before. FHA loan applications had a higher denial rate at around 14.1%, while conforming home loans were denied about 7.6% of the time. The data also showed that Black and Hispanic borrowers faced higher denial rates compared to non-Hispanic and Asian borrowers.
Why Do Mortgages Get Denied?
Understanding the common reasons behind mortgage denials can actually help you prepare better and boost your chances of approval. When you know what could trip you up, you can take steps to fix those issues before they become problems.
Credit Issues
If you have little to no credit history or a poor credit score, lenders see you as someone who might struggle to repay the loan. This makes them hesitant to approve your application, though you still might have some options available.
Your Debt-to-Income Ratio is Too High
Your debt-to-income ratio (DTI) shows how much you owe compared to what you earn. Ideally, you want this around 28% or less, though most lenders will accept up to 36%. Once you hit 43% or higher, getting approved becomes much harder.
Issues With the Property Itself
Some loans, particularly FHA loans, have specific requirements about the condition of the home you want to buy. If the property doesn’t pass inspection, your application could be denied.
Appraisal Comes in Low
When a home’s appraised value is lower than what you’ve agreed to pay, lenders might deny your application or only offer to lend you less than you need. If they do offer a lower amount, you’d need to cover the difference yourself.
Employment Changes
Getting promoted or switching to a better-paying job in your field usually isn’t a problem. But certain job changes can raise red flags—like switching careers entirely, taking a job with a set end date, or going from being an employee to working as a freelancer or consultant.
Legal Issues Like Judgments or Liens
Before closing, lenders check for any legal claims against the property. If they find unpaid court judgments or tax liens connected to the home you want to buy, that’s likely going to result in a denial.
Retiring Early
Even if you’ve saved up plenty of money, taking early retirement can be a concern for lenders. If you can’t demonstrate sufficient ongoing income, they might consider you too risky to lend to.
Recent Changes to Your Credit Accounts
Closing credit card accounts before applying for a mortgage can actually hurt you. It reduces your total available credit, which can lower your credit score. Similarly, opening new credit accounts during this time signals to lenders that you’re taking on additional debt, which they don’t like to see.
Student Loan Debt
Student loans can lead to denial in two ways: if the outstanding balance pushes your DTI ratio too high, or if you have a history of missing payments on those loans.
Where Your Down Payment Comes From Matters
Lenders need to verify where your down payment money is coming from. If they can’t verify it, or if it’s coming from sources that aren’t allowed (like a seller providing assistance or a loan that isn’t secured by collateral), your application will be denied.
Too Many Tax Write-Offs
If you’re self-employed and claim lots of business deductions on your taxes to save money, this can backfire when applying for a mortgage. Lenders look at your income after all those deductions. If that net income is too low for the loan amount you’re seeking, you might need to dial back on the write-offs next time.
Can You Be Denied After Pre-Approval?
Yes, it can happen during the underwriting stage. Pre-approval is based on a quick look at your credit score, income, DTI ratio, and assets. But underwriting goes much deeper—lenders examine your pay stubs, W-2 forms, bank statements, tax returns, and other financial documents in detail.
This thorough review gives lenders the complete picture of your financial situation. If something doesn’t look right, or if your finances have changed significantly since pre-approval, your application might not make it through.
What Happens When You’re Denied?
You’ll receive a denial letter, either by email or regular mail. Some lenders also call to let you know. Most lenders explain why they denied your application, but if they don’t, you have every right to call and ask. Once you understand the reason, you can work on fixing it before you apply again.
What Can You Do After Being Denied?
Don’t panic—mortgage denials happen to lots of people, and there are several paths forward. Sometimes it’s just a matter of providing missing paperwork. Other times, you’ll need to explore different approaches.
Talk to Your Lender
By law, lenders must tell you why they denied your application. Sometimes they just need more paperwork or clarification on something. Once you know the specific reason, try talking with your lender directly. You might be able to provide the documents they need, or sometimes just explaining your situation over the phone can lead an underwriter to reconsider.
Review Your Credit Reports Carefully
If you didn’t check your credit before applying and that’s what caused the denial, it’s time to dig into your credit reports. You need good credit to qualify for most mortgages, and if there are errors dragging down your score, you can get them fixed.
Mistakes on credit reports are surprisingly common—a Consumer Reports study found that 34% of people have at least one error on their credit reports. If you find a mistake, contact the credit bureau and ask them to correct it. Just keep in mind this takes time, which might mean withdrawing from your current offer temporarily.
Consider Government-Backed Loans
If a conventional mortgage didn’t work out because of your credit score or down payment size, government-backed loans might be your answer. These programs have more flexible requirements, though you’ll still need to meet certain criteria.
USDA Loans
The U.S. Department of Agriculture guarantees these loans for homes in rural areas, small towns, or certain suburban locations. They’re designed for people with low to moderate incomes and require no down payment at all.
VA Loans
These loans are guaranteed by the Department of Veterans Affairs and are available to military veterans, active-duty service members, reservists, and eligible surviving spouses. Like USDA loans, they require no down payment.
FHA Loans
Backed by the Federal Housing Administration, these loans are more forgiving when it comes to credit scores—you might qualify with a score as low as 500. Your down payment could be as little as 3.5% or as much as 10%, depending on your credit score.
Apply for a Smaller Loan Amount
Sometimes the issue is simply that you’re asking to borrow too much. A lender might not want to give you $750,000 but would happily approve $600,000. Your income directly affects how much you can borrow, so if you can find a less expensive home or scrape together a larger down payment, applying for a smaller loan amount might do the trick.
Look Into Down Payment Assistance
The more you can put down upfront, the less you need to borrow. While this doesn’t guarantee approval, it definitely improves your odds. Many down payment assistance programs prioritize first-time buyers, but not all of them do.
You might qualify if you have low to moderate income, decent credit, an acceptable DTI ratio, and plan to live in the home yourself. Assistance can come as one-time grants, savings-matching programs, forgivable loans, or low-interest loans. The repayment terms vary—for instance, a forgivable loan doesn’t need to be repaid if you live in the home for a certain period, typically five years or more.
Find a Co-Signer
If poor credit or insufficient income is holding you back, having someone with good credit co-sign your mortgage might solve the problem. Lenders look at the co-signer’s credit score and income too, which could not only help you get approved but also secure a lower interest rate. The challenge is finding someone willing to take on this commitment, since mortgages are typically long-term obligations.
Take Time to Fix the Problems
If you’ve exhausted all your options, sometimes the best move is to wait and address whatever’s preventing you from getting approved. Got a low credit score? Start rebuilding it, which might take several months or even a year or more. Income too low? Consider taking on a second job. Don’t have enough saved for a down payment? It’s time to start setting money aside.
