Applying for a mortgage is a significant financial step, but not all applications are approved. Having your mortgage application denied can be frustrating, especially if you were counting on securing a home loan.
However, understanding why rejections occur and what steps you can take to improve your chances can help you successfully reapply.
Next, we will address the most common reasons why mortgage applications are denied, what you should do if you are rejected, and how long the underwriting process typically takes.
Why are mortgage applications denied?
Lenders evaluate mortgage applications based on strict financial criteria. If any of these factors raise concerns, the lender may reject the loan.
Thus, below are the most common reasons why mortgage applications are denied.
Insufficient Income
Lenders assess your income to determine if you can afford the monthly mortgage payments.
If they believe your earnings are too low or inconsistent, your application may be denied.
This often happens when:
- Your debt-to-income (DTI) ratio is too high, meaning you already have significant debt payments.
- Your income is unstable, which is common for freelancers or self-employed individuals.
- You have not been employed long enough at your current job to establish financial stability.
Thus, if your income is considered too low, lenders may be concerned about your ability to make consistent payments.
Poor Credit Score
Your credit score is one of the most critical factors in mortgage approval. A low credit score signals potential risk to lenders, leading to rejection.
Therefore, even if you meet income and employment requirements, a credit score below 620 may disqualify you from conventional loans.
Lenders also look for red flags in your credit report, including late payments, excessive credit use, or past bankruptcies.
Thus, improving your credit score before applying for a mortgage can significantly increase your chances of approval.
Lack of Employment History
Lenders favor borrowers who have been consistently employed for at least two years.
Thus, if you have recently changed jobs or have gaps in your employment, they may question whether your income is stable. Self-employed applicants face additional scrutiny, as their earnings may fluctuate.
Thus, to increase the chances of approval, make sure to have a stable employment history and provide income tax statements or financial statements if you are self-employed.
Recent Credit Inquiries
Applying for multiple credit cards, personal loans, or auto loans before a mortgage can be a red flag.
Frequent credit inquiries may suggest financial instability, and each application slightly decreases your credit score.
Thus, if you plan to buy a house soon, avoid taking on new debt in the months leading up to your mortgage application.
What to do if your mortgage application is denied
A mortgage application denial is not the end of the road. There are steps you can take to improve your financial profile and increase your chances of approval in the future.
Find out why your application was rejected
Lenders must provide an explanation of why they denied your application. Understanding the specific reason will help you take corrective action.
Request a copy of your credit report and review it for errors, missed payments, or high levels of debt.
If there are errors, dispute them with the credit bureau to improve your score.
Explore alternative mortgage options
Different lenders have different criteria. If one lender denies your mortgage, another may approve it. Some alternative options include:
- FHA Loans — Easier to qualify with lower credit scores and smaller down payments.
- VA Loans — Designed for veterans and active military with favorable terms.
- USDA Loans — Suitable for homebuyers in qualified rural areas with income restrictions.
Therefore, researching different mortgage programs can help you find one that suits your financial situation.
Improve your credit score
If your mortgage application was denied due to a low credit score, take steps to strengthen your credit profile:
- Pay your bills on time to establish a positive payment history.
- Reduce outstanding credit card balances to lower your credit utilization.
- Avoid opening new credit accounts until your mortgage is approved.
Monitoring your credit regularly ensures you are aware of any issues that may affect future applications.
Save for a larger down payment
A larger down payment decreases your loan-to-value (LTV) ratio and reduces the lender’s risk. If possible, save more before reapplying. This can:
- Reduce the amount you need to borrow, resulting in lower monthly payments.
- Improve your chances of approval by showing financial stability.
- Potentially eliminate the need for private mortgage insurance (PMI), saving money.
Lenders generally view borrowers who can contribute more upfront favorably.
Consider a co-signer
If your income or credit score is too low, a co-signer with strong credit and stable income can improve your chances of approval.
A co-signer assumes financial responsibility for the loan, making lenders more confident in granting approval.
However, both you and the co-signer must fully understand the commitment. If payments are missed, both credit scores will be affected.
How long does mortgage underwriting take?
The mortgage underwriting process typically takes 30 to 60 days, depending on the loan’s complexity and the lender’s review process. Here is a general timeline:
- Loan Application (1-3 days) — The borrower submits financial documents, such as pay stubs, tax statements, and bank statements.
- Credit and Income Verification (1-2 weeks) — The lender reviews the borrower’s credit history, employment situation, and debt-to-income ratio.
- Property Appraisal (1-2 weeks) — The lender requests an appraisal to determine the market value of the property.
- Final Underwriting Review (1-2 weeks) — The underwriter evaluates all documentation before making a final decision.
- Loan Approval and Closing (1 week) — If approved, the borrower finalizes the loan agreement and prepares for closing.
Delays may occur if additional documentation is needed, so staying organized and responsive can help speed up the process.
Having your mortgage application denied can be disheartening, but it doesn’t mean you’ll never qualify for a home loan.
Understanding the reasons for rejection, improving your credit score, reducing debt, and exploring different mortgage programs can increase your chances of approval.
If your application was recently denied, take time to address the issues that led to the rejection.
Strengthening your financial profile, saving for a larger down payment, and considering alternative loan options can make all the difference.
For more mortgage tips and financial advice, continue exploring our site and stay informed about the best strategies to secure your home loan! Want a suggestion? Read also our content explaining Top First-Time Buyer Mistakes and How to Avoid Them.
