For debtors in right this moment’s costly housing market, getting accepted for a mortgage is usually a problem. Mortgage charges have soared from pandemic-era lows, residence values are close to report highs and residential value appreciation is outpacing wage progress.
All of meaning there’s no assure a lender will approve your mortgage software. Right here’s a have a look at how lenders resolve to increase credit score, and a few widespread the explanation why mortgage functions get rejected.
How does mortgage underwriting work?
Mortgage underwriting is the method of verifying and analyzing the monetary data you present your lender — all with the purpose of supplying you with a solution of sure, no or perhaps. As a part of the applying, you hand over financial institution statements, W-2s and different tax paperwork, latest pay stubs and any extra documentation the lender requires.
Dispense with any stereotypes concerning the outdated days of lending or the film “It’s A Great Life”, when a banker decided your creditworthiness by the firmness of your handshake and the crispness of your shirt. Normally, a mortgage officer or mortgage dealer will acquire your data and submit it to an underwriting software program system. Loans that will probably be offered to Fannie Mae, for instance, use Desktop Underwriter (DU), whereas loans offered to Freddie Mac leverage Mortgage Product Advisor (LPA).
Fannie Mae and Freddie Mac are government-sponsored enterprises that interface with lenders to maintain the mortgage market steady. Between them, they purchase or again about two-thirds of all U.S. residence loans.
Methods like DU and LPA don’t enable for a lot in the way in which of human judgment. The software program determines whether or not you’re both accepted, rejected or requested for extra data.
Such automated underwriting, because it’s formally referred to as, is the norm these days — a part of the reforms to the mortgage financing world developed after the 2007–09 mortgage meltdown and subsequent monetary disaster. “Previous to the disaster, there was extra leeway,” says Invoice Banfield, chief enterprise officer at Rocket Mortgage. “Now, most of that subjectivity is gone.”
There are lots of causes — out of your earnings to the kind of property you’re shopping for — that you might see your mortgage declined by underwriter software program. And if it does, there could also be little the human mortgage officers can do about it.
Take note: Past your approval or denial, the primary factor the lender decides throughout underwriting is your mortgage’s rate of interest. In addition they use underwriting to find out how a lot to cost you in charges.
Causes for mortgage denial
“There are a thousand potential questions Fannie (or Freddie) may return,” says David Aach, chief working officer at Blue Sage Options, a mortgage know-how agency. “That’s the nightmare of the underwriting course of.” Listed here are a few of the extra widespread causes underwriters reject mortgages.
1. You might have credit score points
Your credit score rating is the one most essential think about figuring out your mortgage charge – and whether or not you get accepted in any respect. Typically, one of the best offers go to debtors with credit score scores of 740 or above, and ones within the “good” vary — 670 to 739 — are probably the most fascinating.
You’ll be able to qualify for some forms of mortgages with a lot decrease scores than others. As an illustration, VA loans are usually obtainable to debtors with scores of 620 or above, whereas loans backed by the FHA can go to these with scores as little as 500.
Earlier than making use of for a mortgage, test your credit score rating and credit score report and dispute any errors. In case your credit score rating is low, work on boosting it earlier than you apply (for instance, you might ask a card firm to extend your credit score line, which routinely lowers your credit score utilization ratio). You probably have a qualifying credit score rating, be sure you don’t do something through the mortgage course of to trigger it to drop, like miss a cost, max out a bank card or apply for another new mortgage.
Should you don’t have a credit score rating in any respect, some lenders do have different credit score scoring strategies, akin to analyzing your financial institution deposits. In truth, in January 2025, Fannie Mae launched a brand new replace to DU in assist of “rising entry to credit score for populations akin to these with restricted or no credit score histories.”
2. You might have an earnings shortfall
Your debt-to-income (DTI) ratio — the portion of your gross (pre-tax) month-to-month earnings spent on repaying common obligations — indicators to lenders whether or not you’re ready to tackle an extra main debt. In case your DTI is simply too excessive, you might be rejected for a mortgage. Most lenders require a DTI of lower than 43%. Some will go as much as 50% when you’ve got components to offset that larger DTI, like a giant financial savings account.
Intention in your cost obligations to make up about one-third of your earnings: A DTI round 36% is the best, qualifying you for higher mortgage phrases. Should you owe rather a lot in scholar loans, automobile loans or bank card balances, work on bringing these balances down earlier than making use of for a mortgage.
Additionally, take into consideration the size of the mortgage: The longer its time period, the extra reasonably priced its month-to-month funds. So, choosing a 30-year mortgage would possibly decrease your possibilities of getting your mortgage declined by underwriter software program. Take note, although, that you just’ll pay extra in curiosity over the mortgage’s lifespan, in comparison with shorter-term loans.
On the earnings aspect, points usually emerge when the mortgage applicant is self-employed. The software program is geared to W-2s — the wage-and-tax-statement from an employer — and would possibly flag your file if you use other ways to show your earnings. It may also trigger a difficulty in case your earnings stream is irregular, even when your earnings are excessive.
Additionally, enterprise house owners usually maximize write-offs and bills when doing their taxes — however that widespread follow flummoxes the underwriting fashions. “Self-employed individuals know what they make, however they don’t know what an underwriter is searching for,” says Tom Hutchens, president at Angel Oak, a lender specializing in non-qualified mortgage (QM) loans (mortgages outdoors the standard standards). “They may be absolutely accepted, however then an underwriter seems to be on the tax returns” and sees that “$10,000 a month would possibly grow to be $5,000 a month in earnings.” The decrease quantity upsets the software program, which then dings the applicant.
3. The loan-to-value (LTV) ratio is simply too excessive
Lenders additionally have a look at how a lot of a mortgage you need vis-à-vis the worth of the house you’re shopping for — one thing referred to as the loan-to-value (LTV) ratio.
The larger your down cost, the much less you borrow, and the decrease your LTV. As an illustration, if you happen to’re shopping for a $400,000 home with a down cost of $80,000, your LTV is a snug 80%. However if you happen to’re placing down $20,000 and financing the remaining $380,000, the LTV is as much as 95%. (Whereas there’s no single good LTV share, lenders often wish to see it round or under 80% — for standard loans, anyway.)
Low down funds are one of many large causes for mortgage denial. The upper your LTV, the upper the probability that your mortgage will probably be flagged for follow-up questions, or rejected altogether. Should you really feel you need assistance reducing your LTV, look into down cost help — each state has these applications, particularly for first-time patrons — to extend the amount of money you may convey to the deal.
4. You’re attempting to finance an out-of-favor property
Not all properties are created equal, so far as lenders are involved. The normal, indifferent single-family residence nonetheless guidelines, and options can confound.
Condos are one significantly robust sort of residence to finance. In response to the June 2021 collapse of an oceanfront tower close to Miami, Fannie and Freddie rolled out new guidelines overlaying rental loans. The enormous mortgage market-makers have determined to not finance some buildings which have low reserves, want repairs or are going through lawsuits. Critics say the stricter opinions are inflicting rental gross sales to disintegrate, even in buildings with no structural points.
Manufactured properties additionally will be difficult to finance. And if appraisers or inspectors discover a structural flaw or different concern with the house itself, that can also gradual the approval, and even kill it.
5. One thing just lately modified in your monetary life
The lending course of prizes monetary stability and predictability (keep in mind what we stated about earnings, above). Sadly, a latest job change or interval of unemployment can throw a wrench in your approval. A brief employment historical past or interruption in earnings sends warning indicators to the software program, too.
Uncommon exercise in your checking account will be one other concern, even when it grows your money reserves. Massive, uncommon deposits would possibly point out you borrowed cash in your down cost — which you’ll must repay alongside together with your mortgage. Should you acquired cash from kin that can assist you purchase a home, make sure that to submit a present letter as a part of your software.
6. You don’t meet the mortgage program’s necessities
Various kinds of loans include completely different specs.
If you wish to get an FHA-insured mortgage, for instance, your own home can’t exceed the mortgage restrict relevant to the situation. In 2025, that’s $524,225 in most areas. The home additionally must cross a particular sort of appraisal that appears on the property’s situation. The specifics put within the place by the FHA add extra potential causes for mortgage denial.
Equally, loans backed by the VA and the USDA have their very own distinctive necessities.
On prime of all of this, lenders usually have their very own proprietary tips. Failing to fulfill any of them can result in your mortgage software being denied.
7. You’re lacking data in your software
Ensure to fill out the mortgage software in its entirety. If it’s incomplete, the underwriting software program would possibly discard your software, leading to an automatic rejection.
The best way to get a mortgage after your software is denied
Take coronary heart: If you’re denied a mortgage, all will not be misplaced. There are workarounds to many of those points.
You probably have a novel earnings scenario, akin to proudly owning a enterprise with unsteady money stream, you would possibly apply for a non-QM mortgage. These loans include extra versatile credit score standards and earnings necessities than standard loans, making them preferrred for many who don’t match inside the usual borrower field.
In case your credit score rating or LTV was the issue, you can even think about loans backed by the FHA or VA. Their phrases are extra beneficiant, geared towards debtors with decrease credit score scores or little money for down funds.
Handbook underwriting
The overwhelming majority of conforming loans — these eligible to be purchased by Fannie and Freddie — are determined by way of computerized underwriting. It’s quick, low-cost and takes bias out of the method. However some loans are nonetheless reviewed by a human. Lenders usually do guide underwriting when an software would doubtless be denied via an automatic system, or if the borrower has some uncommon circumstances however is in any other case certified.
Sure forms of mortgages, like jumbo loans and non-QM loans, usually tend to be manually underwritten. However you may request it for any mortgage, if you happen to consider your explicit scenario is not going to be absolutely understood by the software program. Be ready to produce extra paperwork — monetary statements reaching farther again, for instance — and for an extended course of. Keep in mind that, even with a guide underwriter, your mortgage nonetheless has to adapt to particular necessities.
Backside line
The mortgage software course of will be stuffed with surprises — with a key one being that an automatic underwriting system usually decides your approval or denial. The important thing causes underwriters reject mortgages usually contain credit score rating points, earnings shortfalls, excessive LTV ratios, property sort or latest modifications in your monetary scenario. However the software program doesn’t essentially need to have the final phrase.
Discover out why your software was denied, after which search treatments. You’ll be able to discover options to standard conforming loans, or request guide underwriting (a overview by a human underwriter), for instance. Any of those might present a pathway to homeownership.
FAQs
—How lengthy do underwriters take to approve a mortgage?
It will depend on the lender, the instruments they use and the way good you had been at offering the required data. On common, it takes about 44 days to shut a new-purchase mortgage.
—How fearful ought to I be about underwriting?
Not very. Take steps earlier than you strategy lenders — like paying down different money owed and bettering your credit score rating — and it’s best to really feel assured when making use of. Should you’re nonetheless nervous, you may discover prequalification earlier than you search preapproval. It is a much less stringent course of that can provide you an concept of the place you stand.
—What are some issues I shouldn’t do throughout underwriting?
To keep away from a mortgage declined by underwriter groups, do two issues. First, don’t make any monetary modifications. Maintain paying your payments on time and don’t open any new loans or traces of credit. Second, keep responsive. The lender would possibly ask for extra data. Should you don’t present it in a well timed method, it might result in denial.
