Can An Underwriter Reject Your Mortgage Loan?

Getting a mortgage loan is an exciting yet stressful process You’ve found your dream home, negotiated a price, and signed a contract All that’s left is securing financing so you can move in.

But there’s one final hurdle – underwriting approval. This is when the lender reviews all of your financial information to decide if you qualify for the mortgage. And yes, your loan can be rejected by the underwriter.

While scary, underwriting rejection doesn’t have to derail your homebuying plans if you understand the reasons why and take steps to get approved.

What Is Mortgage Underwriting?

Underwriting is the final approval stage of the mortgage process. It happens after you’ve submitted your loan application and all required paperwork.

The underwriter will carefully analyze the following to determine if you’re eligible for the mortgage:

• Income – Pay stubs, tax returns, bank statements to verify your income is enough to repay the loan.

• Assets – Bank and investment statements to confirm you have funds for the down payment and closing costs.

• Credit – Credit reports and scores to evaluate your repayment history.

• Debt – Documentation of outstanding debts like credit cards, auto loans, student loans to calculate your debt-to-income ratio.

• Collateral – Appraisal and inspection results to ensure the home is worth the loan amount.

Underwriting protects lenders from taking on too much risk. If you don’t meet the guidelines, the underwriter can reject your application.

How Often Do Underwriters Reject Loans?

According to the 2022 Ellie Mae Origination Insights Report, around 10% of mortgages face rejection during underwriting.

Rates vary depending on economic conditions and your qualifications. Borrowers with lower credit scores and high debt see higher denial likelihoods.

Fortunately, you can take steps to boost your approval odds which we’ll cover shortly.

Top 8 Reasons A Mortgage Is Denied In Underwriting

While underwriters consider many factors, these are the most common reasons for loan rejection:

1. Low Credit Scores

Most conventional mortgages require a minimum credit score between 620-650. Government-backed loans allow scores as low as 500-580.

If your scores fall below those ranges, or took a sudden dip, the underwriter may deny your application. Missed payments, collections, and high balances can also lead to rejection.

2. High Debt-To-Income Ratio

Your DTI compares your total monthly debt payments to pre-tax income. Most lenders cap DTIs around 50%. Ratios above 43% face scrutiny.

Too much existing debt like credit cards, auto loans, and student loans can push your DTI over the limit and cause denial.

3. Insufficient Down Payment

Conventional mortgages need at least 3% down. Insufficient funds for a down payment and closing costs can lead to rejection.

Some government programs allow down payments as low as 3.5%. Make sure you know the minimum for your loan type.

4. Questionable Bank Account Activity

Large, recent deposits without a documented source could appear you took out a personal loan for the down payment. Underwriters will want a thorough explanation of the source of funds.

5. Job Changes

Employment gaps and frequent job changes in the last 2 years could signal instability. Provide documentation like an offer letter if you recently switched jobs.

6. Incomplete Information

Missing signatures, blank fields, and unsubmitted documents like tax returns can cause denial. Thoroughly complete all forms and quickly submit any additional documentation requested.

7. Property Issues

Major repairs needed or an appraisal that comes in lower than the sales price could lead to rejection if you can’t pay the difference. Make repairs before underwriting.

8. Previous Mortgage Delinquencies

Foreclosures, short sales, and mortgage modifications in the last 7 years may cause denial. Wait for these to fall off your credit reports or provide a detailed explanation.

What To Do If Your Mortgage Is Denied

Don’t panic if you get rejected! You still have options:

• Ask why. Get specifics on exactly why you were denied and by how much you failed to meet requirements.

• Dispute errors. If your credit report contains mistakes negatively impacting your score, file disputes immediately.

• Provide more documentation. Give more explanations, bank statements, or pay stubs if needed.

• Get a cosigner. Adding someone with better credit may help you qualify if you were denied due to credit or DTI.

• Change loan programs. FHA loans allow lower credit scores and down payments than conventional mortgages.

• Improve your finances. Use the time to pay down debts, increase your credit score, and save more for a down payment if possible.

• Talk to other lenders. Your financial profile may be a better fit with a different lender like a credit union or community bank.

With some effort, you can potentially overturn a rejection and get your loan approved!

7 Tips To Avoid Denial In Underwriting

While you can’t guarantee approval, you can take proactive steps to minimize the risk of rejection:

• Shoot for a minimum 740 credit score. Higher scores get better rates and face less scrutiny.

• Keep your DTI under 36%. Work on paying down debts before applying.

• Save a down payment of 20%. Putting more down shows financial strength.

• Avoid large purchases or deposits before underwriting. Don’t give the appearance of taking on new debts.

• Explain job changes or gaps right away. Provide documentation like offer letters.

• Thoroughly complete all forms and submit requested documents ASAP. Don’t delay!

• Get repairs done and negotiate a lower price if the appraisal is low.

The Takeaway

While underwriting rejection is discouraging, it’s not the end of the road. Now you know why it happens and how to overcome it. With perseverance and improved finances, you can get your loan approved.

Just remember – communicate openly with your lender, document everything completely, and correct any credit issues. With preparation and patience, you’ll get the keys to your new home soon enough.