Why was my mortgage denied in underwriting?

It’s the job of people called underwriters to decide whether you can be trusted to pay back such a large sum of money.

Let’s take a look at some of the most common reasons underwriters deny loans.

The appraisal was too low

A home appraisal is a key part of the process, wether you’re buying a home or refinancing. An appraiser will research the home to tell the underwriter how much it’s truly worth.

Underwriters want to know that you’re not spending (and thus borrowing) more than the property is worth. After all, if you ever need to sell, you want to make sure you can get enough money for the property to pay off the mortgage.

Problems are rare, as realtors usually do extensive market research before recommending a price. But if the appraisal is far lower than the accepted offer on the home, the lender may not be willing to join the deal.

The home is in rough shape

You’ll want to insist on a home inspection before you buy your new home. You may not see a glaring electrical problem waiting to happen, but a home inspector will.

In some cases, particularly when a house is touted as a fixer-upper, sellers could put their home on the market “as-is” or with deferred maintenance — repairs big or small that they haven't completed yet.

Lenders won’t always need to see an inspection report, but they might ask if the appraiser observes any possible health or safety issues. When a house is in need of critical repairs — maybe the roof is looking dicey, or the furnace doesn’t work — the lender could demand that repairs be conducted before it lends you a dime.

A government-backed loan, from the Federal Housing Administration (FHA) for example, could have additional property standards, meaning you could be disqualified for something as simple as low water pressure.

You can’t prove steady income

An important part of your loan application is your job and income status. A lender wants to ensure you’ll be able to keep up with your monthly payments.

Being out of work will make getting a mortgage pretty difficult. Lenders will even get nervous if they see that you’ve changed jobs lately.

You’ll need to provide W-2 wage statements from the past two years, along with pay stubs from the past 30 days, as proof of employment and steady income. If you’ve started a new job recently, ask for a letter of employment or offer letter — something with the company letterhead that confirms your new expected income.

You have bad credit

If your credit score is in the dumps, you can kiss that mortgage goodbye.

Each mortgage lender will have different standards, but it could take a score of 700 or higher to be taken seriously. The exception is if you secure an FHA loan, in which case you might get approved with a score as low as 500.

Even if you checked a while back, your credit score can sometimes plummet without your knowledge. You may want to sign up for a free monitoring service like Credit Sesame that will show you your score, inform you if it changes and offer personalized advice on how to improve it.

You have too much debt

Still paying off your student loans? Carrying a sizeable balance on your credit cards?

High debt without a high salary to match is a red flag because it tells lenders you might not be able to handle your mortgage payments. They’ll be out of pocket if you default down the road.

Your “debt-to-income ratio” is calculated by adding up all your monthly debt payments and dividing them by your gross monthly income. Most lenders will show you the door if your ratio is above 43%, and some will be even stricter.

You can’t prove you’ve got the cash

Lenders need to know you have money in the bank to pay for the down payment and closing costs.

You’ll need to provide bank statements or a proof-of-funds letter to show you’re good for it. And if you’re getting financial help from family, you may also need a gift letter to prove the money isn’t another loan you have to pay back.

If you can’t provide the necessary documents, and the lender can’t verify you have the assets, there’s a good chance your application will end then and there.

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How often does a mortgage underwriter deny a loan?

As you can see, a lot of things can go wrong during a home purchase. So while it feels like a disaster to get denied, it's more common than you might think.

One in every 10 applications to buy a new house — and a quarter of refinancing applications — get denied, according to 2018 data from the Consumer Financial Protection Bureau.

Rather than focusing on the rejection, try to chart your next steps. First, zero in on the timing.

Why was my mortgage loan denied at pre-approval?

When you get pre-approved for a mortgage, the lender is only looking at you — not any particular property.

That means the problem is probably one of the following:

  • Proof of income: Do you have those W-2s? What story do they tell?
  • Proof of assets: Do your bank statements or proof-of-funds letter show you’ve got the money?
  • Proof of identity: Does your lender have your Social Security number? Did you provide a signed authorization to pull your credit report?
  • Poor credit score: Does your score suggest you’re a risky investment?
  • High debt: Will your new mortgage compete with other debts each month?

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Why was my mortgage loan denied at closing?

Just when you thought you were at the finish line. Having your application denied at closing will be extra painful considering all of the work you’ve put in so far.

If you got your mortgage pre-approved, it’s possible that your file has changed or something is wrong with the home:

  • New credit: Lenders are going to do a second credit check before the final loan is approved. Applying for new loans or credit cards in the last couple weeks can potentially ding your score.
  • New purchases: Did you finance a new car recently? That will put additional stress on your debt-to-income ratio.
  • Changing jobs: Lenders care just as much about stability as they care about salary, so even switching to a better job could give them pause.
  • Low appraisal: If you’re borrowing more than the home is worth, getting denied could be a helpful wakeup call.
  • Shaky inspection: You might be confident in your DIY skills, but your lender may expect the home to be in a more livable condition.

What to do if your mortgage loan is denied

Find out why: Most lenders will be happy to explain why you were denied, and in some cases, they may be required to disclose their reasons. Talk to the loan officer about the application. You might even try asking for advice. If you don’t know what you did wrong, you’re doomed to repeat it.

Improve your credit score: Raising your credit score isn’t always a quick fix, but it’s the best way to convince lenders that you’re trustworthy. Start by getting a free credit report and checking closely for mistakes. If you find errors with personal information, creditors or timelines, file a dispute with the credit bureau. Then, concentrate on building your credit. A secured credit card offers a low-pressure way to build credit without going overboard on spending.

Pay down debt: If you came in with a debt-to-income ratio higher than 43%, this result shouldn’t be a surprise. If you’re able, pay down some of your debt to lower the ratio. A consolidation loan could help you speed up the process.

Add income: Easier said than done. In addition to your regular income, consider additional ways to earn some money, like a side hustle or negotiating a raise at work.

Increase your down payment: By providing more money upfront, you’ll decrease the size of the mortgage and reduce the lender’s risk. Depending on your finances, that could be impossible in the short term, so you may need to focus on saving more for the future.

Get a co-signer: If you have a patchy credit history, you can try enlisting a co-signer to help out — that is, someone with a solid financial record who will agree to repay your debt if you can’t. But that can be a risky endeavor for your helpful volunteer.

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About the Author

Ethan Rotberg

Ethan Rotberg

Former Reporter

Ethan Rotberg was formerly a staff reporter at MoneyWise. His background includes nearly 15 years as a writer, editor, designer and communications professional. He loves storytelling, from feature writing to narrative podcasts. His work has appeared in the Toronto Star, CPA Canada and Metro, among others.

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