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Zach Wichter is a former mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
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Troy Segal is a senior editor for Bankrate. She edits stories about mortgages and home equity, along with the finer financial points of owning and maintaining a home.
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“Your mortgage application is denied.” Harsh news. But take heart: That doesn’t always mean you can’t get a mortgage. If your lender rejects your request for a loan, you can take steps to see how you can improve your chances and get a mortgage with your next application.
Here’s what to do when your mortgage application gets denied.
Loan Home Improvement
How often do underwriters deny loans?In Q3 2023, just over 12% of mortgage applications (both conventional and government-backed loans) were denied, according to Home Mortgage Disclosure Act data. Credit issues, changes in employment status and high debt-to-income ratios are three of the most common reasons for the rejection.
If your loan was rejected, your lender will issue a mortgage denial letter to let you know. In this letter, you’ll find information about why you received a turndown, as well as the credit reporting agency used to evaluate your application.
When a lender rejects your loan application, “it shouldn’t be a surprise,” says Brian Koss, the Winchester, Mass.-based regional sales director of Movement Mortgage, a national lender. “Your loan officer should have given you a good assessment” during the application.
The mortgage application process is fairly rigorous, no matter who you’re applying with. If you have one or several strikes against you, the loan officer should give you some indication that you may not qualify.
Whether they have or haven’t, there’s no harm in having a heart-to-heart with your loan officer after you get the letter. “The lender is supposed to provide you with the reasons you were denied so you can take that info to heart and use it to identify a way to resolve things, so you can get on a better financial footing and re-qualify later,” says Bruce McClary, senior vice president of membership and communications for the Washington D.C.-based nonprofit National Foundation for Credit Counseling.
You could still be eligible for a mortgage even if you were denied. But you’ll need to explore other loan programs that may be a better fit for you financially.
Inquire with the loan officer to learn more about alternative mortgages, such as FHA loans or USDA loans, that may be available to you. It’s also worth reaching out to a mortgage broker and having them shop around your information to lenders in their network who may be able to assist with your lending needs.
Your credit score plays a big role in determining what types of mortgage loans and what sort of rates you’re eligible for. Be sure to examine your credit report closely for any errors that might be dragging down your rating.
If your credit score isn’t great and a lender tells you that’s why they turned you down, don’t assume that’s the end of the road for you and a loan. You still might qualify for a different type of mortgage, like a government-backed loan from the FHA, VA or USDA.
Banks don’t always offer every type of mortgage loan , so if you’ve been turned down by the same bank where you’ve been keeping your cash, in many cases, it’s not you; it’s them.
“Seek out someone that works for a non-depository institution and works with a direct mortgage lender versus a bank,” says Corvi Urling, branch manager with NEXA Mortgage in California. “Mortgage lenders generally carry a larger portfolio and would then have the ability to offer access to different programs that you might qualify for.”
You can also work on improving your credit. This means paying your bills on time and keeping little or no balance on your cards. You might also be able to take advantage of credit-boosting programs.
Even with a strong credit score, lenders also look to see how much money you owe for things like credit card bills, car payments and student loans and compare this to how much money you make. As mentioned above, this is known as your debt-to-income ratio, and lenders consider this ratio when determining whether you’re eligible for a new loan.
For example, if you already spend most of your wages on existing high monthly bills, lenders won’t have confidence that you’ll be able to make your monthly mortgage payments as well. In this situation, your mortgage may be denied due to student loans, credit card payments or other financial obligations.
Most of the time, lenders want to see a DTI of less than 43 percent. If you don’t fit that profile, you can take steps to improve that number.
“One of the big things you can do is pay off some other debts,” says David Mele, president of Homes.com. “A credit card is a great place to start.”
You wouldn’t stop buying clothes just because the first thing you tried on didn’t fit, so don’t make that mistake with your mortgage.
“There’s a lot of folks that aren’t bad borrowers but just have credit issues,” says Raymond Eshaghian, president of Greenbox Loans.
There are mortgage loans out there for many different buyer profiles, and just because a standard 30-year loan might have been right for the couple down the street, that doesn’t mean it is for you, too.
“You never want to have all your eggs in one basket. It would be horrible if you get all the way to closing and you have the moving truck out front and now you can’t move into that house,” says Urling, who recommends applying with two or three lenders to help defray the likelihood of being rejected outright. “There’s no obligation for a consumer to take a loan at any point.”
There is no mandatory waiting period after you’ve been denied. However, because a mortgage application usually involves a credit check, which can lower your score, it might be a good idea to wait a bit so that it has time to smooth out.
A co-signer might also help you qualify. For example, if you’re a young buyer with subpar credit, but your parents have stronger credit and are willing to co-sign your loan, a lender may approve you more easily.
Keep in mind: Getting a co-signer may complicate your application because you’ll need to include more supporting documents.
From credit issues to changes in your financial situation, there are many reasons why your mortgage funding was denied. Some of the most common mortgage denial reasons include:
A mortgage rejection can especially sting if you’ve been pre-approved for a loan. But it’s important to realize that getting preapproved for a mortgage doesn’t guarantee that you’ll get financing.
Preapproval is an agreement in principle to lend you a sum of money, based on your creditworthiness: It acts as a preliminary go-ahead from your lender. But, it’s not the same as a lender agreeing to finance your purchase of a particular property. That’s what your mortgage loan application is for.
Odds are, if you get the preapproval, you’ll get the mortgage. But not always. If your financial situation changes between preapproval and final approval, you might be denied. For example, if you switch jobs, take on more debt or receive a negative mark on your credit report after you’ve been preapproved, your lender might spot a red flag and reject your application.
A mortgage denial letter, also known as a denial letter or adverse action notice, is a formal written communication provided by a lender to a borrower when their mortgage application has been declined. This letter outlines the reasons why the mortgage application was not approved and provides details on the factors that influenced the lender’s decision.
Key components typically included in a mortgage denial letter are:
Sometimes, mortgage approvals fall through on closing day, whether due to a recent change in employment, an expensive purchase on your credit card or a new credit application. If this happens, you might consider taking a step back from the home-buying process to work on your credit and pay off debt before looking for another home.
Yes, it is possible to get a mortgage while having student loans. However, student loans can impact your ability to qualify for a mortgage, as they are considered as part of your overall debt load and can affect your debt-to-income ratio (DTI), a key factor lenders use to evaluate your financial health and ability to repay a mortgage. From that, they’ll decide whether to approve you for a mortgage and how much money to give you.
The mortgage loan origination process often comes with many highs and lows, so try not to get too discouraged if a lender denies your mortgage loan. If that happens, take the time to understand why your mortgage was rejected, address the issue and explore other loan options.
Arrow Right Former Mortgage reporter, Homes
Zach Wichter is a former mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
