How Often Does an Underwriter Deny a Loan and What to Know

An underwriter's decision to deny a loan can be a stressful and frustrating experience for homebuyers. According to the article, a loan is denied about 25% of the time, which is a significant percentage of loan applications.

To put this into perspective, out of every 4 loan applications, 1 is denied. This can be due to various reasons, including credit score issues, income problems, or property defects.

Some common reasons for loan denials include credit scores below 620, debt-to-income ratios above 43%, or loan-to-value ratios above 80%. These statistics highlight the importance of carefully reviewing one's financial situation before applying for a loan.

In many cases, loan denials can be avoided by addressing issues before applying for a loan, such as paying off debt or improving credit scores.

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Loan denials can be a major setback, but understanding the common reasons behind them can help you prepare and avoid potential issues. According to the National Community Reinvestment Coalition, the top six reasons for mortgage denials in 2020 were related to debt, credit history, appraised value, incomplete applications, unstable income, and unverified funds.

Having too much debt compared to your income can be a major issue, with lenders preferring a debt-to-income ratio of 43% or less. This can be a problem even if you've paid off debt recently, as it may still be on your credit report.

Your credit history or score can also be a major factor in loan denials, especially if your credit report expires before closing or contains errors. This can be a major issue if you've recently completed a bankruptcy or foreclosure.

A home's appraised value or condition can also impact loan denials, particularly if it doesn't meet basic safety and health standards. This can include issues like a leaky roof or broken water heater, which may need to be fixed before closing.

Loan denials can also occur if your application is incomplete or information can't be verified. This is one of the top reasons for loan denial in 2020, so make sure you provide all necessary documents and information.

Stable income and employment history are also crucial for loan approvals, with most loan programs requiring a two-year history of steady earnings and employment. If your paystubs, tax returns, or W-2s show income or employer fluctuations, an underwriter may not feel comfortable approving your application.

Finally, lenders must verify the source of funds for your down payment and closing costs, so large, undocumented cash deposits may trigger a loan rejection.

Here are the top reasons for loan denials, according to the National Community Reinvestment Coalition:

Loans can be denied due to application errors, so it's essential to double-check your paperwork for accuracy.

Unverifiable income, undisclosed debt, and minor errors like the number of family members can cause problems with underwriters.

Most mistakes are easily fixable if caught early on, but you don't want something slipping through the cracks until the last minute.

Underwriters are sticklers for accuracy, so it's crucial to ensure your information is accurate and bring anything that looks off to your loan officer's attention.

Simple mistakes, oversights, and paperwork flubs do occur, but most of the problems that could affect your loan are easily fixed, if not easily preventable.

Income discrepancies can lead to denial if the underwriter only accepts the application with sufficient income to cover mortgage payments.

Employment verification issues can arise if the borrower's employment status changes or cannot be verified during underwriting, resulting in a denial.

Missing or incomplete documentation, such as tax returns, bank statements, or gift letters, can also lead to denial as the underwriter cannot properly assess the borrower's financial situation.

Simple mistakes, like unverifiable income, undisclosed debt, or minor errors like the number of family members, can cause problems and even lead to a denial.

Having low credit can be a major obstacle in the homebuying process. If you have a weak credit report or no credit history at all, you're likely to be denied during the underwriting process.

A low credit score shows underwriters a poor history of managing credit and debt, leading them to be weary of you paying your loan back. No credit leaves you as an unknown risk, which is far too big of a risk for most underwriters to take.

You can avoid being denied over your low to no credit score by taking the time to repair your credit score. This will help prove to lenders that you're serious about buying a home and able to pay back your loan.

A significant drop in credit score between the initial pre-approval and the final underwriting can also lead to denial. This could happen if you've taken on additional debt or missed payments.

It's crucial to be honest and transparent about your financial situation to avoid any issues during the underwriting process. If you fail to disclose outstanding debts or financial obligations, it can lead to denial once discovered during underwriting.

In most cases, you won't make it to the underwriting stage if your credit history, income, or down payment funds don't meet the mortgage program's basic guidelines.

Undisclosed Liabilities can be a major issue in the mortgage application process. If you fail to disclose outstanding debts or financial obligations, it can lead to denial once discovered during underwriting.

Private mortgages on real estate can be a hidden liability. If you bought a home from a relative or financed a rental property from a private investor, the loan balance and monthly payment should be disclosed.

Recent credit applications can also be a problem. Let your lender know if you recently opened a new credit account, even if it doesn’t show up on your credit report.

Alimony or child support payments often don't appear on your credit report, but underwriters check your bank statements and paychecks for signs of regular debt payments. Make sure to disclose these payments upfront.

Payment arrangements for past-due taxes or judgments can also be a hidden liability. If you’re on a payment plan, provide all documentation upfront to avoid any issues during the underwriting process.

Application errors can lead to loan denial or delays, so it's essential to double-check your loan paperwork for accuracy.

Unverifiable income, undisclosed debt, and even minor errors like the number of family members can cause problems with underwriters who are sticklers for accuracy.

Most mistakes are easily fixable if caught early on, but you don't want something slipping through the cracks until the last minute.

Simple mistakes, oversights, and paperwork flubs do occur and can create a delay or even be a deal-breaker.

Bring anything that looks off to your loan officer's attention to prevent potential issues.

Most problems that could affect your loan are easily fixed, if not easily preventable.

Missing or incomplete documentation can lead to denial as the underwriter cannot properly assess the borrower's financial situation.

Tax returns, bank statements, and gift letters are common types of documentation that can be missing or incomplete.

Double-checking loan paperwork and ensuring everything is correct can help catch mistakes early on.

Underwriters are sticklers for accuracy, and unverifiable income, undisclosed debt, and even minor errors like the number of family members can cause problems.

Simple mistakes, oversights, and paperwork flubs do occur, but most problems that could affect your loan are easily fixed, if not easily preventable.

If you cannot furnish copies of your profit and loss statements, balance sheets, and other business financials, it can cause problems and prevent you from getting to the closing table.

Being transparent with your loan team and providing all documentation when requested can help prevent these issues.

A recent job change can worry underwriters, who want to see stability in your income and employment history. Recent employment changes can lead to questioning your ability to pay off your mortgage loan.

If your tax returns show inconsistent or insufficient income, it can trigger additional scrutiny or a denial. Your lender may require copies of your profit and loss statements, balance sheets, and other business financials.

Even a good career move can trigger a new set of documentation and verifications. Underwriters may consider income from a new job to be unreliable, so it's essential to plan ahead and be transparent with your loan team.

A significant drop in credit score between the initial pre-approval and the final underwriting can lead to denial. This could happen if the borrower has taken on additional debt or missed payments. A credit score of 700 or higher is generally considered good, but a drop below 620 can raise red flags with lenders. Taking on new debt, such as a car loan or credit card, can negatively impact your credit score. Missed payments on existing debts can also cause a significant drop in credit score.

Employment and income factors play a significant role in determining your mortgage eligibility. Lenders want to see that you have a stable income and a decent employment history.

To qualify for a mortgage, you'll typically need to show a two-year history of steady earnings and employment. If your paystubs, tax returns, or W-2s show income or employer fluctuations, an underwriter may not feel comfortable approving your application.

A change in employment or income can also impact your debt-to-income ratio. If you've recently switched careers or taken on a side job, it's essential to disclose this information to your lender.

Here are some key facts to keep in mind:

Lenders also want to verify the source of your income. If you're self-employed or have irregular income, you may need to provide additional documentation, such as tax returns or a letter from your accountant.

A recent employment change can be a major hurdle in the home buying process. Lenders want to see stability in your income and employment history, and a change in jobs can raise concerns about your ability to repay the loan.

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If you've recently changed jobs, it's not the end of the world. However, you should be prepared to provide additional documentation to your lender, such as proof of your new income and employment history.

According to Example 3, underwriters may consider income from a new job to be unreliable, so it's essential to plan ahead and discuss any changes with your loan officer. This can help prevent delays or even denial of your loan application.

It's worth noting that underwriters typically prefer to see at least two years of steady employment and earnings before approving a loan. This is to ensure that you have a stable income and can make your mortgage payments.

If you've been denied a loan due to a recent employment change, it's not impossible to get approved. You can work with your loan officer to address the issues and provide additional documentation to support your application.

Here are some tips to keep in mind if you're considering a job change during the home buying process:

A high loan-to-value ratio can be a major obstacle when trying to get approved for a loan. This is because lenders consider it a risk to lend a large amount of money to someone who doesn't have a significant down payment.

LTV is a ratio of your mortgage balance to your home's appraised value. If your LTV is too high, lenders may deny your loan.

Not having a lot of money upfront to use for a down payment can cause a high LTV. This means you'll need to take out a larger loan, which can be a problem.

Mortgage lenders want to see that you can effectively manage your debt, so a high debt-to-income ratio can also be a reason for a loan denial. This is because they're concerned that you won't be able to cover both your home loan and your existing debt.

Having a high amount of debt compared to your monthly income will dissuade lenders from approving your loan. This is especially true if you have installment payments like auto loans that are making it harder to manage your debt.

Changes in your debt-to-income ratio can also lead to a loan denial. This can happen if you take on new debts or experience increased expenses that make it harder for you to manage your debt.

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Property and appraisal issues can be a major roadblock in the loan approval process. Your lender may deny a loan if there are major issues like foundation damage, roof or electrical problems discovered during an appraisal.

Some FHA loans have government-mandated standards that the home must meet before the lender can approve a loan. If the property appraisal comes in lower than expected, it could affect the loan-to-value ratio and render the mortgage ineligible for approval.

Structural problems, code violations, or environmental hazards can also get in the way of loan approval. If the property has issues that violate lending guidelines, the underwriter may deny the loan.

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Loan denials are more common on home equity loans, home improvement loans, and refinance mortgage applications, with home purchases having the lowest denial rates.

According to recent data, 9.3% of all home-purchase applications were denied in 2020. This is a relatively low denial rate, especially when compared to other types of loans.

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If your loan is denied, it's essential to talk to your loan officer and understand the reason for the denial. This will give you a short time to try to overturn the denial before it becomes official.

You can also try gathering all your paperwork and checking with other lenders, as some may specialize in loans for borrowers with credit and income challenges.

In some cases, a well-written letter of explanation may be enough to clarify gaps in employment or explain a large cash deposit in your account.

It's also worth considering alternative mortgage programs, such as FHA loans, which may have easier qualifying requirements.

In 2020, 14.1% of FHA loan applications were denied, compared to 7.6% of conforming conventional loans.

Here's a rough breakdown of loan denial rates by type of loan, based on 2020 data:

It's worth noting that loan denials are not uncommon, and you may be able to reapply after a few weeks or months to improve your chances of getting approved.

A significant drop in credit score between pre-approval and final underwriting can lead to denial due to additional debt or missed payments.

Changes in employment status, such as losing a job or becoming unemployed, can cause lenders to deny a loan.

Employment verification issues can arise if the borrower's employment status changes or cannot be verified during underwriting, resulting in denial.

Policy changes or regulatory issues can affect a borrower's eligibility for a loan, leading to denial even if they were initially pre-approved.

Here are some common last-minute issues that can cause mortgage denial:

These issues can arise at any time during the mortgage process, making it essential for borrowers to be transparent and proactive throughout the application process.