When it comes to buying a home, obtaining a mortgage is a critical step in the process.

A mortgage loan is a type of loan specifically designed for purchasing a property, with the property serving as collateral for the loan. 

However, getting approved for a mortgage can be a complex and challenging process, and many factors come into play when a mortgage underwriter evaluates an application.

A mortgage underwriter’s job is to sift through stacks of loan applications and play detective to determine whether the borrower is trustworthy enough to repay the loan while ensuring that the lender’s guidelines and requirements are being met before approving a loan.

They’ll scrutinize financial documents, pore over credit reports, and even take a look at the property appraisal to make sure everything is on the up and up.

And let’s not forget the power they hold in their hands.

As the final gatekeeper to mortgage approval, a mortgage underwriter can make or break a buyer’s dream of owning a home.

It’s a big responsibility, but someone’s gotta do it!

So, while the job of a mortgage underwriter may not be the most exciting, it’s an essential part of the mortgage lending process. 

Mortgage Denials

So, how often do underwriters deny loans?

The answer is, unfortunately, more complex.

Many factors can influence an underwriter’s decision, and the outcome of the application will depend on a range of factors.

According to a report by the Federal Financial Institutions Examination Council, about 10% of mortgage applications are denied.

That might not sound like a lot, but it can be a devastating blow if you’re the one who falls into that 10%.

However, in general, mortgage underwriters deny loans often, particularly if the borrower has a poor credit history, insufficient income, or a high debt-to-income ratio.

Worried about underwriting?

Don’t be.

While the mortgage underwriting process can be intimidating, borrowers should not necessarily be worried about it. 

Underwriting is simply evaluating borrowers’ financial and creditworthiness to determine if they qualify for a mortgage loan.

It’s an essential part of the mortgage lending process; without it, lenders would be unable to determine whether a borrower can repay the loan.

To lessen the worry:

Getting pre-approved for a mortgage is smart and can be helpful for several reasons.

Firstly, pre-approval gives an idea of how much a buyer can afford to borrow and the potential monthly mortgage payments.

This can help narrow the home search and avoid wasting time looking at properties outside the buyers’ price range.

Secondly, while pre-approval is not a guarantee of mortgage approval, it can give a good indication of a buyer’s eligibility and help identify any potential issues that may need to be addressed before moving forward with the underwriting step. 

Additionally, having pre-approval can help expedite the mortgage process once a buyer finds a property they want to purchase.

More info on getting pre-approved:

• How to know what you qualify for
• Documents needed for a mortgage pre-apprvoal

Examples of loans that got denied

Here’s an example of a loan that we denied:

Mary, a first-time homebuyer, applied for a mortgage loan to buy her dream home. She had a good credit score, stable income, and was pre-approved for a loan of $500,000.

However, during the underwriting process, the underwriter noticed that Mary had recently opened several credit cards and increased her debt-to-income ratio. 

Mary was so excited about purchasing a home that she went on a furniture shopping spree.

As a result, the underwriter denied her loan application. She increased her DTI ratio beyond what the loan requirements allowed, so the underwriter had concerns about her ability to make timely payments on her debts and mortgage. 

Although Mary was disappointed, she was able to work with her loan officer to pay off her credit cards and improve her debt-to-income ratio.

She reapplied for the loan several months later and was approved.

This example highlights the importance of maintaining a healthy debt-to-income ratio and avoiding opening new lines of credit or taking on additional debt during the mortgage application process. 

It also shows that a loan denial is not the end of the road and that there are steps borrowers can take to improve their financial situation and increase their chances of approval in the future.

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Here is another example of a loan that we’ve denied:

John applied for a mortgage and was already approved for a certain amount based on his income and employment status. 

However, a week before closing on the loan, he quit his job to pursue a new business venture.

He didn’t notify his loan officer or the underwriter of the change in his employment status.

A day before closing, the underwriter discovered that John was no longer employed at his previous job and requested documentation regarding his new employment status. 

Since John had no proof of income from his new business venture, the underwriter could not verify his ability to repay the loan and ultimately denied his loan application.

In this case, John’s failure to disclose his change in employment status led to his loan being denied. 

Borrowers need to be upfront and honest with their loan officers and underwriters about any changes in their employment status during the mortgage application process to avoid potential loan denials.

More info on job related underwriting

• How to Qualify for a Mortgage: The Ultimate Guide to Income Requirements
• How Long Do You Have To Be Employed To Buy A House?

Earnest Money Deposit – What happens to it if you get denied a loan?

If a loan is denied, the fate of the earnest money deposit will depend on the specific terms of the purchase agreement and the reason for the loan denial.

In some cases, the purchase agreement may include a contingency clause that allows the buyer to back out of the deal and receive a refund of their earnest money deposit if the loan is not approved.

This can protect the buyer in the event of a loan denial.

However, suppose the buyer cannot obtain financing due to their actions, such as failing to provide accurate financial documentation or misrepresenting their financial situation.

In that case, they may not be entitled to refund their earnest money deposit.

It’s important for buyers to carefully review the terms of the purchase agreement and understand the potential consequences of a loan denial before making an earnest money deposit. 

Buyers may also consider working with a real estate agent or attorney who can provide guidance and help negotiate favorable terms in the purchase agreement.

A mortgage can be denied due to issues with the property.

A mortgage can be denied due to issues related to the property itself.

For example, the underwriter may identify problems with the property that make it a risky investment for the lender, such as significant damage or necessary repairs that would need to be made before the property can be considered safe for habitation.

The underwriter may also consider factors such as the property’s location, zoning, and overall condition. For example, if the property is located in a flood zone or has a history of damage from natural disasters, the underwriter may hesitate to approve a mortgage.

In addition, the underwriter will require a satisfactory appraisal of the property before approving the loan.

If the appraisal comes in lower than the agreed-upon purchase price, the lender may be unwilling to provide the full amount of the loan, which could result in a denied mortgage.

Overall, there are several factors related to the property itself that could result in a denied mortgage, so it’s important for both buyers and sellers to carefully consider these issues before entering into a purchase agreement.

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What Are Some Reasons an Underwriter Can Deny a Loan?

An underwriter can deny a loan for several reasons, even if you meet the basic eligibility requirements. 

Here are some common reasons why a loan may be denied:

Poor credit history or low credit score: If you have a history of late payments, delinquencies, or bankruptcies, it can hurt your chances of getting approved for a loan. A low credit score can also make it harder to qualify for a loan or may result in higher interest rates.

Insufficient income or assets: Lenders want to ensure you have the financial means to repay your loan. Having a low income or few assets can make you appear to be a higher-risk borrower, which can lead to a loan denial.

Employment history: Lenders prefer borrowers who have a stable employment history. If you’ve changed jobs frequently or have gaps in your employment history, getting approved for a loan can make it more challenging.

Debt-to-income ratio: Lenders will look at your debt-to-income ratio when deciding whether to approve your loan. If you have too much debt relative to your income, it can make you appear to be a higher-risk borrower, leading to a loan denial.

Property issues: If the property you’re purchasing has problems that affect its value or marketability, such as zoning violations or liens, it can lead to a loan denial.

Low appraisal: If the property you’re purchasing is appraised at a value lower than the purchase price, it can make getting approved for a loan harder. Lenders typically require that the property’s appraised value is equal to or greater than the purchase price.

If your loan is denied, don’t give up.

Instead, work with your loan officer to understand why your loan was rejected and to explore other options for financing your home purchase.

With persistence and effort, you can eventually get the loan you need to purchase your dream home.

Common Mistakes that Can Lead to Loan Denials

Even if you have a good credit score and a stable income, some mistakes can lead to a mortgage loan denial. 

Here are some common mistakes that borrowers make that can hurt their chances of getting approved for a mortgage loan:

Failing to review your credit report: Before applying for a loan, it’s essential to check your credit report to ensure everything is correct and accurate. Even a tiny mistake on your credit report can lead to a lower credit score, making it harder to get approved for a loan.

Taking on too much debt: Lenders will look at your debt-to-income ratio when deciding whether to approve your loan. If you have too much debt relative to your income, it can make you appear to be a higher-risk borrower, leading to a loan denial.

Not saving enough for a down payment: Many lenders require a down payment of at least 3-5% of the home’s purchase price. If you don’t have enough saved for a down payment, it can make it harder to get approved for a loan. Unless you are applying for a VA mortgage or USDA, which don’t have a down payment requirement.

Changing jobs frequently: Lenders prefer borrowers who have a stable employment history. If you’ve changed jobs often in the past few years, it can make you appear to be a higher-risk borrower, leading to a loan denial.

Not disclosing all of your debts and financial obligations: When you apply for a loan, you’ll be required to disclose all of your debts and financial obligations. If you fail to disclose all of this information, it can lead to a loan denial.

Be honest and upfront with your lender about your financial situation, and take steps to address any issues contributing to your loan denial. With persistence and effort, you can eventually get the loan you need to purchase your dream home.

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What Should I Do if My Mortgage Loan Is Denied?

If your mortgage loan is denied, you should first ask your loan officer why your application was rejected. 

Your lender is required to provide an explanation of why your application was denied, so make sure you request that information. 

Once you know why your application was denied, you can take steps to address any issues.

One common reason for a loan denial is a low credit score. If this is the case for you, focus on improving your credit score by paying your bills on time, keeping your credit utilization low, and correcting any errors on your credit report.

Another reason for a loan denial could be your debt-to-income ratio. If this is the case, consider paying down some of your debt or finding ways to increase your income. 

If you have been denied a loan, adding a co-borrower may increase your chances of approval. 

A co-borrower is someone who applies for the loan with you. Adding a co-borrower can increase the total income used to qualify for the loan, which may help meet the lender’s qualification requirements.

Mortgage denial doesn’t mean you are out of options

While it’s never fun to think about the possibility of a loan denial, it’s important to understand that it can happen.

Knowing what to do if your application is denied and understanding how underwriting works can improve your chances of getting approved for a mortgage loan.

Remember, being denied a loan doesn’t mean you are out of options.

Instead, use it as an opportunity to learn and improve, and you’ll be well on your way to homeownership.

Are you ready to apply? Start the process by completing the form below.

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