If you’re getting a mortgage loan, you’ll need to go through a lender’s mortgage underwriting process. It’s the step in which your lender reviews your loan application to determine if your loan can be approved. Unfortunately, your loan can be denied if you do not meet the requirements for a loan program, or if the lender is unable to verify your information.
However, you do have some options if your loan is denied in underwriting. Lenders aren’t always correct, and asking for details on exactly why you’re denied could reveal an error on their part. It could also give you steps for how to remedy any areas of your loan application that fall short of the minimum requirements.
Read on for more details on what options you might have if your mortgage loan application is denied.
Summary of options if you get denied
While there can be many reasons for mortgage lenders to deny a mortgage application, a general rule of thumb you can follow is to ask for the specific guideline being used for your denial. Many guidelines, such as Fannie Mae and Freddie Mac conventional loans, can be viewed by the public.
In many cases, you may find that the lender is misinterpreting your specific set of circumstances. In other instances, you can find that more lenient criteria are available for borrowers who meet the definition of certain extenuating circumstances, such as a divorce or medical emergencies.
Why mortgage loans might be denied
Mortgage loans can be denied if the lender is unable to verify information in your loan application. A denial can also occur if the information verified does not meet the minimum qualification requirements. These requirements encompass various aspects of your credit, income, assets, and property.
Common reasons for denial can include:
- Credit (credit score and credit history)
- Income (DTI, debt-to-income ratio)
- Assets (cash to close and reserve requirements)
- Property (LTV, loan-to-value ratio)
Below, we’ve detailed what each of these areas typically involves, common denial reasons, along with what options you have if you run into these scenarios.
Credit score and credit report
Lenders will obtain a copy of your credit report to evaluate your payment history and credit score. A credit score is a numerical figure designed to show how likely you are to miss payments. In addition to your credit score, the details of your payment history will also be considered.
A review of your credit history can include the following:
- How long you’ve had credit
- Payment history with other creditors
- Number and type of late payments, if any
- How recently you’ve applied for credit
- New credit accounts recently opened
- How much of your credit limits are being utilized
- How many accounts have a balance
- Types of credit accounts you have (mortgage, installment, revolving, etc.)
Below are common credit-related reasons for loans being denied and what you can do to fix any issues that result in a denial:
Low credit score
If your credit score is not high enough, there are some things you might be able to do to quickly raise your credit score, such as paying off some credit cards or disputing inaccurate information. Most creditors often only report updates to the credit bureaus once per month. However, you can call and ask for updates to be made more quickly. This is sometimes referred to as an off-cycle update, and you can then ask your mortgage lender for a rapid rescore of your credit.
Unable to obtain credit reports
Lenders usually obtain credit reports from the three major credit bureaus: Experian, Equifax, and Transunion. Each can have varying information, including different credit scores. Depending on the type of loan you’re applying for, lenders may only require one, two, or all three reports.
If you have frozen your credit reports, your lender won’t be able to obtain any information and cannot issue an approval. If so, you’ll need to unfreeze your reports to allow your lender access temporarily. If you already have an online account set up with each of the three major credit bureaus, you can do this in under five minutes.
Excessive debt resulting in a debt-to-income ratio that exceeds the maximum
Your credit report contains most of the information lenders use in determining how much debt you’re carrying and whether you can afford a new mortgage loan based on your monthly income. Your credit report shows what your monthly payments are for your mortgages, auto loans, student loans, credit cards, and other consumer debt. This is then used to calculate your debt-to-income (DTI) ratio – your total monthly debts divided by your gross monthly income.
If your DTI is too high, you have a few options. You can pay off debt to eliminate those monthly payments from your DTI. In some cases, you can also pay down installment debt to 10 months or less to omit it from your DTI as a short-term debt. Examples of installment debt commonly include mortgages, auto loans, student loans, and personal lines of credit.
The lender discovered undisclosed debt
Credit reports may sometimes report debts that do not typically appear in a credit history. Some examples can include child support, alimony, or other court-ordered government payment plans. Lenders may also uncover debt based on any other discrepancies they find, such as additional addresses that may suggest ownership in another home and recent credit inquiries that may indicate a newly opened loan.
To avoid any unexpected surprises, it’s recommended that you review your credit report before you apply for a mortgage loan to ensure its accuracy and to allow you time to correct any errors.
You have significant derogatory items
Significant derogatory items typically include bankruptcies, foreclosures, collections, and charged-off accounts. Regardless of your credit scores, many lenders require these to be several years old before they will consider lending you funds on a mortgage loan.
If you’re denied a mortgage loan for this reason, ask the lender if there are any exceptions for extenuating circumstances. Oftentimes, the minimum required waiting period is shorter if you can prove that it occurred as a result of circumstances such as a divorce, job loss, family emergency, or another uncommon scenario that is not likely to happen again.
Your credit accounts contain potentially negative comments
Underwriters evaluating your credit can also review the comments on each individual account to see if there are any indications that an alteration to the standard repayment terms has occurred. Some examples include accounts with comments indicating an account is in consumer credit counseling or has undergone a loan modification due to a borrower’s inability to make timely payments based on the original loan terms.
If you are denied for similar reasons, ask if re-establishing the terms of the original loan will help. You may also want to provide a copy of the modification agreement to show what the new repayment terms are and whether it is temporary or permanent.
Income & employment
Your income is a key factor lenders evaluate to determine if you can afford the monthly mortgage payments. This includes the type of income you earn, such as whether it is a salary, hourly wage, or variable income such as bonuses and overtime pay. The type and stability of your employment can also play a factor.
Below are common income-related denial reasons:
When a lender reviews your income, it’s used to calculate your debt-to-income (DTI) ratio. If it exceeds a certain percentage, you won’t be able to get approved for the loan. If this happens, check for accuracy by asking how they calculated the figures.
Insufficient length of variable income
Variable income typically requires a two-year history in order to be used for qualification purposes of your mortgage loan. Some loans such as conventional mortgages allow for as little as one year of bonus or overtime income to be considered stable. If this is the case, you can ask the lender for an explanation of why they will not accept a one-year history when it’s permitted by Fannie Mae.
Declining trend of variable income
Variable income such as bonus or overtime pay is typically averaged over the past 12 to 24 months. If the income has been declining, a lender may use a more conservative approach. If there were extenuating circumstances that affected your variable pay earnings, you can present this as evidence to the lender to see if they’ll consider using a higher average of the income.
Insufficient length of self-employment
You’ll typically need a two-year history of being self-employed to be eligible for a mortgage loan. However, some loan programs allow as little as a one-year history, such as conventional loans underwritten with a Fannie Mae lender.
If you’re turned down for this reason, ask the mortgage lender what guidelines were used. Most guidelines are publicly available, and you can review the documents for yourself to determine if any exceptions are allowed.
Declining trend of self-employment income
Just like with variable income, a declining trend of self-employment income can be cause for concern. From a lender’s perspective, they need to know that your income moving forward won’t continue to drop.
If a lender denied your mortgage loan for this reason, consider whether there are any extenuating circumstances that would explain the drop in income. If you can provide documentation to support this, the lender may be able to reconsider the amount of income it uses for the purposes of getting you qualified for the loan.
Proof of assets is usually required if you need funds for a down payment, closing costs, or reserves. However, not all assets are treated equally. Here is what you can do if you’re turned down for any of the following reasons.
Unacceptable source of assets
In most cases, assets must come from a non-borrowed source of funds that has a 60-day paper trail. To reduce the chance of running into issues, we recommend drawing funds from a checking, savings, or investment account where you can provide at least 2 months’ worth of bank statements.
One possible exception for borrowed funds is if the funds borrowed are secured by an asset. A common example is funds obtained from a home equity loan or home equity line of credit (HELOC). Conventional loans, including Fannie Mae mortgages, allow for borrowed funds to be used as an eligible source for things like down payment requirements, closing costs, and reserves.
Some loans may require you to carry a sufficient amount of reserves. Reserves are liquid assets, like cash or stocks, that you could access in the future if needed to cover unexpected expenses or loss of income. In some cases, investment and retirement accounts may not be given the full current value. This is because, unlike checking and savings accounts, investment and retirement accounts may be subject to early withdrawal penalties and fluctuations in value based on the stock market.
The value of your accounts may be discounted to 60% or 70% of its current value. If this is the case, consider providing other assets in liquid accounts. In extreme cases, you may need to liquidate the assets to qualify for the loan.
Funds are not seasoned
It’s common for lenders to need to see a minimum of a 2-month history of funds that you’ll be using for closing costs, reserves, or a down payment. If you currently have funds in a safety deposit box or other source and intend on using it for a down payment or closing costs for your mortgage application, you may want to deposit the funds at least 2 months prior to applying for a mortgage loan.
Insufficient cash to close
If you don’t have sufficient cash to close, you can try reducing your closing costs or getting assets from another source. To reduce your closing costs, you can adjust your loan amount or choose a higher interest rate that has a credit towards your closing costs.
For other sources of funds, you can consider getting a gift or liquidating assets from your investment and retirement accounts. If gift funds are allowed, you’ll typically need an eligible family member to provide these funds to you, as is the case with conventional and Fannie Mae mortgage loans.
The value and condition of your home is another critical aspect that lenders can evaluate in determining whether your mortgage application can be approved. Depending on your mortgage balance and the value of your home, lenders may require you to have a certain amount of equity in the home. Additionally, they’ll want to ensure it’s adequately insured and contains no hazards that could result in legal or compliance issues.
Below are common property-related denial reasons:
Insufficient property value
If you’re turned down for insufficient property value, ask to see a copy of the lender’s appraisal report. If it was a computerized estimate, you can request a more in-depth physical appraisal inspection.
If the physical inspection still comes back low, review the appraisal report for any inaccuracies. Also, look at the properties that were used as comparables. You can also ask a local real estate agent to provide you with feedback on whether they believe the appraisal to be accurate.
Health or safety hazards
For most loan programs that involve a physical inspection of the property, it must be free of any health or safety hazards. This can include incomplete renovations or items that do not adhere to local fire codes, such as missing smoke and carbon monoxide detectors.
Unpermitted additions or property modifications not done to code
If you’ve had any work done to your house, you’ll want to make sure it has been properly permitted and built to code. If you’re not able to do this in a timely manner, you can ask your lender to deduct the unpermitted items from your home’s appraised value in order to move forward with the mortgage application.
What to do if your mortgage is denied in underwriting
It’s not ideal to have a mortgage underwriter deny a loan. If this happens to your loan application, it’s important for you to understand why this happened. Ask your lender to explain the situation and reference what guidelines were used in the mortgage process. Most lenders will allow a denial to be overturned if an error is discovered. Other times, you’ll be given an explanation of what your options are with other loan programs or possibly other lenders.