Why Is a Mortgage Loan Denied in Underwriting?

When your mortgage or mortgage refinance application gets denied during the underwriting process, it’s important to find out why so you can fix the problem.
Written by Melanie Krieps Mergen
Reviewed by Melanie Reiff
Mortgage and mortgage refinance applications get denied during the underwriting process for reasons including incomplete application information, low credit scores, too much existing debt, and low home appraisals. If this happens to you, you can take steps to fix the problem to avoid being denied in the future. 
It can be jarring to have your application for mortgage or mortgage refinance denied in underwriting—especially if you were initially pre-approved. Unfortunately, sometimes an underwriter can discover new information during the underwriting process that causes them to reject your application.
If your mortgage application has been denied, one of the most important things you can do is find out why so you can get approved at some point in the future. That’s why
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What is underwriting?

During the underwriting process for a mortgage or a mortgage refinance, your potential lender will verify and evaluate all your application information to determine whether you qualify for a loan. That includes your credit score, credit history, income, outstanding debts, and more.
Essentially, your lender wants to feel confident in their investment and that you’ll be a reliable lender who can consistently make on-time payments. 
Following the 2008 financial crisis, lenders are legally required to make sure you meet a minimum set of requirements to verify you’ll actually be able to repay your home loan. You’ll usually have to produce a whole host of documents to satisfy those requirements, including bank statements, pay stubs, and/or tax returns.

Can an underwriter deny a loan?

Yes, an underwriter has the ability to deny your loan application if you don’t meet their qualifying criteria.
Even if you were pre-approved for a mortgage, it’s possible an unexpected discovery—like a change in your income or employment or a large recent purchase—could raise red flags and cause the underwriter to deny your application.
That makes it important to understand the requirements of the mortgage for which you’re trying to qualify. You also should communicate with your lender early on if your circumstances change during the loan application process.

How often are loans denied? 

If your mortgage or mortgage refinance application was rejected, you’re not alone. According to data from the
Consumer Financial Protection Bureau (CFPB)
, 9.3% of home-purchase loans were denied in 2020. Mortgage refinance applications were denied at an even higher rate of 13.2%.
The data also showed that Black and Hispanic applicants faced higher denial rates for home loan applications at 18.1% and 12.5%, respectively, while 6.9% of non-Hispanic white applicants and 9.7% of Asian applicants were denied. For refinancing, the denial rates were 23.2%, 17.6%, 11%, and 12.1%, respectively. You can view more insights from the report
It’s important to know that the federal
Fair Housing Act
makes it illegal to deny mortgages based on race as well as additional protected classes, including skin color, religion, sex, gender identity, familial status, and national origin. If based on any of these characteristics, the following would also be considered discriminatory:
  • Unnecessary closing costs
  • Offering less ideal mortgage terms, like a higher interest rate
  • Pushing borrowers toward less ideal lending options
  • Offering a poorer customer service experience during the mortgage application process
The Department of Housing and Urban Development (HUD) offers this
helpful guide
on understanding fair lending practices. Depending on where you live, state- and city-level laws often offer similar and sometimes additional protections that you can look into. 
If you believe the reason your mortgage application was denied was discriminatory, you can file a complaint with the appropriate agency or agencies. For cases involving discrimination under the Fair Housing Act, you can do so
, as well as find out more information about the process.
Key Takeaway: Mortgages or loan refinance applications are denied roughly 9-13% of the time. However, certain demographic groups have seen higher rates of rejection—despite this being illegal. If you believe you’ve been unfairly denied, you can file a complaint. 

Why mortgage loans get denied in underwriting

So, why do mortgage and mortgage refinance applications get denied? There is a multitude of factors that could cause your mortgage to be denied during the underwriting process. The following are some of the most common reasons why mortgages and mortgage refinances are rejected.

You have too much debt

One of the most common reasons mortgage and mortgage refinance loan applications get rejected is because the applicant’s debt-to-income ratio (DTI) is too high. 
DTI ratio requirements will vary depending on the lender and loan type, but financial experts often recommend limiting your DTI ratio to 36% or less of your income. In some cases, you might still qualify for a mortgage with as much as 50% or less, but having more debt can sometimes mean you'll end up with a higher interest rate when approved.

You had undisclosed debt

If you weren’t upfront about all your debts during the mortgage application process and they’re discovered during the underwriting process, your application might get rejected. This also could call the accuracy of the rest of your application into question.
You may think about credit card, car loan, and student loan repayments when you submit a mortgage or mortgage refinance application, but it’s also important to remember that alimony or child support payments, tax repayment plans with the Internal Revenue Service (IRS), liens, and past judgments are all payments you’d want to disclose to your lender, too.

Your credit score was too low

Most mortgage lenders require a minimum credit score to qualify for a mortgage or mortgage refinance. If your current credit score doesn’t meet the mark, your application will likely be denied.

You made a big purchase during the underwriting process

Your home is one of the most expensive investments you’ll make in your life—so no lender wants to see that you’re buying other high-cost items, like a car, at the same time.
There’s not necessarily a dollar amount that would make something a “big purchase”; it largely depends on the lender. Even appliance or furniture purchases could be enough to cause your home loan to be rejected.

Your application has incomplete, inaccurate, or unverifiable information

If your mortgage application has missing or unverifiable information, your lender won’t be able to approve your loan application. Perhaps even worse, if your application is found to have inaccurate information, that makes it harder to trust it as a whole, making your underwriter more inclined to reject it.
This might seem like a no-brainer, but it’s still one of the most common reasons that loan applications are denied—so be sure to give your application a careful re-read before submitting it.

You have an inconsistent income history

This can be especially tricky for self-employed individuals. Conventional mortgage lenders typically want to see about two years of steady income and employment history. 
If your income tends to fluctuate monthly, a lender may be concerned about your ability to make your monthly mortgage payments reliably. Even a recent job change could make a lender wary of approving your mortgage or mortgage refinance application.

You can’t verify funds for your down payment or closing costs

For a lender to grant you a mortgage or mortgage refinance, they have to verify that you have the funds on hand to cover the down payment and closing costs. If you can’t provide proof that you have the cash you need, you won’t be seeing any money from your lender.

Your home appraisal was too low

When you’re buying a home, many lenders will require you to get a home appraisal so they can confirm the home you’re buying is a good investment on their part. If the purchase price by far exceeds the appraisal price, your lender may not be willing to offer you the mortgage.
For the same reason, when you’re trying to refinance your mortgage, fluctuating real estate market values can sometimes cause you to end up with a higher mortgage balance than your home is technically worth at the time, which usually won’t sit well with a prospective lender.

What to do if your mortgage loan is denied in underwriting

When your mortgage loan is denied, the most important first step going forward is understanding why your application was rejected so you can address the problem and increase your odds of qualifying for a loan in the future.
Depending on the circumstances, you might be able to fix the problem and get the loan approved if you act quickly enough.
If your mortgage or mortgage refinance application was rejected, here’s what you can do:
  • Talk to your loan officer: You likely won’t ever interact with an underwriter directly, but what you can do is reach out to your loan officer for the reason(s) your loan was denied. The lender must provide you with a written explanation detailing why your application was denied if you request it—plus copies of your credit report that they referenced to make their decision.
  • Submit a letter of explanation: If your underwriter simply rejected your application because of missing information, you may be able to follow up by submitting a letter of explanation to provide the underwriter with the details they need to understand your situation.
  • Get a cosigner: If you’re able, finding the right cosigner could help you qualify for your home loan. Just be aware that it’s a big responsibility for the cosigner to take on—they’ll be on the hook for any missed mortgage payments, and that will negatively impact their credit score.
  • Know your rights as a borrower: If you believe the reason your mortgage loan application was denied was discriminatory, consider
    filing a complaint
    with the appropriate agency or agencies.
MORE: How to buy a car with bad credit

How to avoid mortgage loan denial in underwriting

Just because one lender denied your mortgage application doesn’t mean that another will. Here are some ways you could avoid mortgage loan denial in the underwriting process in the future:
  • Know a lender’s requirements for a particular loan, like a minimum credit score or maximum DTI ratio, and make sure you can satisfy them before applying.
  • Check your credit report to avoid unexpected surprises during the application process. You’re entitled to one free credit report each year. If you find errors, work with the reporting credit agency to get them corrected before applying for a mortgage or mortgage refinance.
  • Rebuild your credit score by making reliable, on-time payments and limiting how much you borrow.
  • Pay more toward debts to reduce your DTI ratio.
  • Adjust your home-buying price range to lower your DTI ratio and potential monthly mortgage payment.
  • If you believe you need to make a potentially significant purchase, check with your lender first to determine how it might affect your application. If you can, it’s usually better to hold off until after you’ve closed on your home.
  • Establish a lengthened employment history with a consistent income.
  • Get an employment offer letter stating your expected income if you’re about to start a new job.
  • If you tried to refinance but your home has negative equity (your mortgage balance is higher than its appraised value), continue paying your mortgage and wait for market conditions to improve if you can.

Finding affordable home insurance

Once you do qualify for that new mortgage, your lender is going to require you to protect your new house with a certain amount of
home insurance
coverage. While insurance payments don’t affect your DTI ratio, finding the right policy at the right rate can make homeownership that much more affordable.
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Yes, an underwriter can deny a loan application for a mortgage or mortgage refinance. The underwriter will review your application information to determine whether the lender should grant you a loan, and if you don’t meet the qualifying criteria, your application can be rejected.
There are different reasons a mortgage loan could be denied during the underwriting process—often, it comes down to factors like the discovery of undisclosed debts or missing application information. 
To find out why your mortgage application was denied, reach out to your loan officer and request a written explanation.
There are many reasons a mortgage refinance application could be denied in underwriting. To find out why your own mortgage refinance application was denied, reach out to your loan officer and request a written explanation.
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