How Often Does An Underwriter Deny A Loan?
May 02, 2023 8-minute read
Author: Sidney Richardson
Being turned down by a mortgage lender, especially after preapproval, can be a huge disappointment. If this has happened to you, though, you shouldn’t give up hope – there’s a reason for it, and there are strategies you can adopt to avoid denial in the future.
Let’s look at how often and why mortgage applications are denied, plus your options for improving your credit so you can reapply and ideally get the house (and loan) of your dreams.
How Often Do Underwriters Deny Loans?
The most recent report provided by the Consumer Financial Protection Bureau reveals that the overall denial rate for home purchase applications for all applicants was 8.3% in 2021, lower than that in 2020 (9.3%) and in 2019 (8.9%).
The report also shows that the denial rate of Federal Housing Administration (FHA) loan applications differed from the overall average, at 12.4% in 2021.
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7 Reasons Why An Underwriter Might Deny A Loan
While credit issues are a common reason why people might be denied a mortgage, they’re not the only reason. Here are a few more that may hamper your efforts to buy a house:
1. Insufficient Credit
If you don’t have a significant credit report, you’ll likely 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
Should You Be Worried About Underwriting?
One of the reasons it’s important to apply for a mortgage prequalification is that it can give you a view into whether your loan application will ultimately be accepted or denied. However, in rare instances when your situation changes drastically between a prequalification and the mortgage closing, it’s possible to be denied at closing. To help prevent that, keep in close contact with your lender throughout the underwriting process so they can help you avoid actions that can adversely affect your ability to get a mortgage.
What To Do If Your Mortgage Loan Is Denied In Underwriting
If you were denied a mortgage, you shouldn’t give up hope. There are a few things you can do now to make your application stronger for when you’re ready to try again.
Talk To Your Lender
The first step is to return to the source. If anyone knows why you’ve been denied a mortgage, it’s going to be your lender. According to the Equal Credit Opportunity Act, lenders are required to tell you why you’ve been turned down, if credit played a role. They must include a letter with the specific details, as well as the name of the credit reporting agency that supplied the information they were using. This can help pinpoint the areas where you might need to change some habits in order to bump up your credit.
But remember, that’s just the first step. If you believe the letter was vague or inaccurate, it’s best to contact your lender to explain your misgivings. They want your business, so they’ll be eager to have a conversation and help you dig up the root of your credit issues.
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.
Check For Errors In Your Credit Report
Between the credit bureaus and the creditors that play a part in developing your credit report, mistakes are bound to happen every now and then. These errors can lower your credit score and be a big headache to fix.
Common errors include outdated information, incorrect payment statuses, wrongfully duplicated negatives, and most importantly, fraudulent accounts. You should eliminate any chance of error by sifting through your credit report with a fine-toothed comb. If you find anything that looks unusual, take the proper steps to dispute your credit report.
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.
Another big key to increasing your score is to have a good mix of revolving credit debt and items like installment loans, such as an auto or personal loan. Mortgage lenders want to see that you can effectively manage different types of debt. Just make sure to pay them on time and don’t take on more than you can handle.
Keep Accounts Open
When you pay your debt down, try not to close the accounts. This could hurt your score because you want to have a variety of accounts open, particularly ones that have been open a long time, to show the fullest extent of your credit history. It can be beneficial to have a mix of credit cards, auto loans, student loans and potentially personal loans to show you’re adept at handling credit.
While you want to pay down debt, it can hurt your credit score to completely close an account because it will eliminate the amount of credit you have available. If you close an account, even if you spend the same amount on your other credit cards, you’re using a larger percentage of your remaining available credit. That’s what’s known as “credit utilization,” and if you use too much of your credit, future creditors may be hesitant to extend loans and other credit to you.
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.
Your credit usage is monitored in the form of credit utilization, which displays your current debt as a percentage. For example, if you have one credit card with a $1,000 limit and another with a $3,000 limit and total carryover balances of $800 per month between the accounts, your credit utilization would be 20% ($800/$4,000). Experts usually recommend using no more than 30% of your overall credit limit between all of your accounts.
Build Your Application Before Reapplying
If your application was denied, remember that there are likely multiple steps you’ll need to take in order to repair it. There are a few ways you can immediately rectify the issues an underwriter finds in your mortgage application. If the fixes were quick – if you were missing some information, for example – your mortgage underwriter would likely have granted conditional approval.
If you’re denied a mortgage, it’ll probably take some time to fix up your application, so don’t expect to reapply immediately without addressing the issues that came up the first time around.
The Bottom Line: 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®.
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