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Understanding Mortgage Denial and How to Avoid It

How Often Do Mortgages Get Denied?

No homebuyer wants to hear that their mortgage application has been denied. While it’s relatively uncommon, it does happen. In 2022, the mortgage denial rate was 9.1%, according to the Consumer Financial Protection Bureau (CFPB). Getting preapproved for a mortgage before making an offer can help you avoid rejection. The preapproval process takes into account your credit, income, employment, assets, debts, and expenses.

Reasons Your Mortgage Could Be Denied

1. There’s an Error in the Paperwork

A simple clerical error, like missing a digit of your Social Security number, could lead to a denial. Important information left out, such as a previous bankruptcy, could also cause issues.

2. Your Income Has Changed

If your income has declined since you were preapproved, that could hurt your chances. Lenders want reassurance that you have steady, reliable income to make your future loan payments.

3. Your Credit Score Has Decreased

Lenders typically require a minimum credit score of 620 to qualify for a conventional mortgage. A score reduction could be a red flag to the lender. Factors that could negatively affect your credit score include taking on new debt, missing debt payments, closing a credit account, or having inaccuracies on your credit report.

4. Your Down Payment Is Low

Having an insufficient down payment is one of the possible signs your mortgage will be denied. Down payment requirements vary based on loan type, but a low down payment means you’ll have to finance a larger percentage of the sale, which could put off lenders.

5. The Home Appraisal Is Low

If the home appraisal puts the home value below the mortgage amount, the lender will not approve the full amount. The homebuyer may have to come up with extra cash to cover the difference.

6. You Have Unverified Cash Deposits

Lenders will take a deep dive into your finances. If they come across large cash deposits, you’ll need to verify them. Unsubstantiated cash deposits could cause a lender to deny your mortgage application.

7. You Increase Your Debt

Taking out more credit or adding a large purchase to your credit card after getting preapproved for a mortgage could be a red flag to lenders. Avoid applying for new credit or making large purchases in the months leading up to applying for a mortgage.

How to Avoid Mortgage Loan Denial

• Check your credit score and take steps to improve it if necessary.
• Double-check your paperwork for errors.
• Hold off on making a career change until after your mortgage is finalized.
• Make sure you have an adequate down payment for the type of loan you’re seeking.
• Be ready to verify cash deposits.
• Avoid taking on new debt, applying for new credit, or closing credit accounts.
• Pay all your bills on time—your payment history is the most important factor that determines your credit score.

What to Do if Your Mortgage Application Is Denied

If your mortgage application is denied, understand why. The lender is required to provide an explanation in writing. This can help guide your next steps. Consider if you qualify for another type of mortgage, such as an FHA loan. Take time to improve your credit, consider down payment assistance, or look for a different home.

The Bottom Line

If you’re in the market for a new home, be aware of potential signs your mortgage will be denied. Communicating with your lender can help. Even if you do run into an issue, it may still be possible to get approved for a home loan. Maintaining healthy credit is one of the most important things you can do.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate the mortgage process and secure the home of your dreams.

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