How Often Do Underwriters Deny Loans? A Comprehensive Guide

Getting a mortgage is a big step, and it’s important to understand the process so you can increase your chances of approval. One of the most important steps is the underwriting process, where a mortgage lender carefully examines your financial situation to determine if you qualify for the loan. But how often do underwriters deny loans?

According to the latest data from the Consumer Financial Protection Bureau, the overall denial rate for home purchase applications for all applicants was 83% in 2021. This is lower than the denial rate in 2020 (93%) and 2019 (8.9%). However, it’s important to note that the denial rate can vary depending on several factors, including your credit score, income, debt-to-income ratio, and the type of loan you’re applying for.

Here are some of the most common reasons why underwriters deny loans:

• Insufficient credit history: If you don’t have a significant credit history, you’re likely to be denied. The first step to fixing this issue is to start building upon your credit history so that your lender has some idea of how you manage credit and debt. They want to see that you can responsibly pay it back. Repairing your credit score will prove to your lender that you’re serious about buying a house and will also make it easier to apply to other loans in the future.
• Insufficient income: You can also be denied for having insufficient income. Lenders will calculate your debt-to-income ratio (DTI) to make sure that you have adequate monthly income to cover your house payment, in addition to other debts you might have. If your DTI is too high or your income isn’t substantial enough to prove you can handle the monthly payments, you’ll be turned down.
• Record of late payment: Your mortgage could also be denied due to a previous late payment. If you’ve ever made a late payment toward a debt, whether it be student loans or an auto loan, it’s likely that this infraction found its way onto your credit report. Your lender may be more hesitant to grant you a mortgage loan if you’ve previously paid bills late.
• High loan-to-value ratio: Your lender will also take your loan-to-value (LTV) ratio into consideration when deciding whether you’re eligible for a loan. Your LTV compares your mortgage principal to the value of the home, and the lower it is, the better. When you purchase a home, your LTV is lowered by your down payment.
• A job change: If you just got a new job, you can sometimes be denied for that reason, too. Lenders prefer stability in a borrower’s income and job. With a new job, they might worry that you won’t have the same income potential you’ve shown in the past, which can make them wonder if you’ll be able to repay your mortgage. While it’s not required, typically lenders prefer you’ve been with the same employer – or in a very similar position – for at least 2 years.
• An unexplained cash deposit: What could be wrong with too much cash? Well, if a mortgage lender sees a recent cash deposit – granted it’s sizable enough – they might be worried that you were gifted the money and might have to pay it back. They’ll want to know the source of any large deposits to feel fully confident lending you money.
• Inspection issues: When you have your home inspection and a major issue pops up, you could be denied your mortgage loan. Lenders typically deny your loan if they see the home as a bad investment during the appraisal process. Although it’s not a good feeling to have your loan denied, it might be the best case scenario – you don’t want to purchase a home laden with problems in need of fixing.

If you’ve been denied a mortgage, don’t give up hope. You can strengthen your application now so that it will be more competitive when you decide to try again.

• Talk to your lender: The first step is to return to the source. Your lender will be the one to know why your mortgage application was denied. The Equal Credit Opportunity Act mandates that lenders notify you of the reasons behind any denials, even if credit was a factor. They have to enclose a letter outlining the particulars and naming the credit reporting company that provided the data they used. This can assist in identifying the areas where you might need to modify your routine in order to improve your credit score.

• Establish credit history: If you’re a first-time home buyer, it’s possible that you might not have built sufficient credit history to satisfy your lender’s requirements. If that’s the case it might just be a matter of time before you’re ready to apply, but if you need to kickstart your credit you can try one of these options:

  • Open a secured credit card: Secured credit cards allow you to start using credit that is secured by your own funds. After building up your score by responsibly using a secured card, you can graduate to traditional credit.
  • Become authorized on a loved one’s credit card: Becoming an authorized user on a parent or other family member’s credit card can help you reap the benefits of their good credit.
  • Take out a credit-builder loan: Credit-builder loans are personal loans secured by your funds and repaid in installments. Like a secured credit card, these help you slowly demonstrate your creditworthiness.

• Keep an eye on your credit: Not new to credit but trying to buy a home with bad credit? The best way to get the ball rolling on rebuilding credit is by monitoring it. Check your credit report and score regularly. Try to always stay on top of your bills so you don’t risk your mortgage being denied due to a late payment. You should also track your monthly debts and credit utilization to see where you need to make changes to improve your score.

• Examine your credit report for errors. Since creditors and credit bureaus collaborate to create your credit report, errors will inevitably occur from time to time. These mistakes can damage your credit and take a lot of time and effort to correct.

• Pay down and diversify debt: One of the best ways to improve your score is to pay down any debts and pay off any collections showing on your credit report. If it’s unrealistic for you to pay off the entire balance, try to work out an arrangement with creditors to pay what you can, which will show up on your credit report as “paid as agreed.” While it won’t raise your credit score as much as paying off the debt in full, paying something is better than nothing.

• Keep accounts open: Try not to close the accounts after you have paid off your debt. This could lower your score because, in order to demonstrate the entirety of your credit history, you should have a variety of open accounts, especially ones that have been open for a long time. To demonstrate your credit management skills, it can be advantageous to have a variety of credit cards, auto loans, student loans, and possibly personal loans.

• Increase your credit limits: A good second phase of your credit score rebuild after you’ve shown your hard work is to try and get your credit limits increased. For example, if you currently have a $500 credit limit, a lender might be willing to increase it to $1,000 once they see the strides you’ve made.

• Keep credit utilization low: In order to keep your credit score high, you don’t want to use too much of it, as this can be a sign of financial stress.

• Develop your application before resubmitting it: If your application was rejected, keep in mind that you’ll probably need to take several actions to make it right. There are a few quick fixes for any problems an underwriter discovers with your mortgage application. If the corrections were simple—for example, if you omitted some information—your mortgage underwriter would have probably given conditional approval.

• Don’t worry about past denials: You might worry that your mortgage denial will leave a trail should you attempt to try again. The good news is that while your credit report will reflect that you applied, it doesn’t show that you were denied.

And it’ll only mildly impact your credit – it will show as a “hard” pull, meaning that others will see that you were applying for credit, but servicers understand that can happen when you’re shopping around. In other words, being denied a mortgage shouldn’t impact your credit significantly.

If you’re ready to get started on the journey of buying a house, take action and start your mortgage application online with the Home Loan Experts at Rocket Mortgage®.