Mortgage Application Denied? Here’s What To Do (2024)

Having your mortgage application denied can be a frustrating experience. When you feel ready to buy a home but lenders don’t seem to agree, you’re going to want to understand exactly why you can’t get approved for a home loan. At least one of the explanations below will probably describe your situation in more detail than your loan rejection letter provided.

21 Reasons a Lender May Reject Your Mortgage Application

When it comes to approving or denying mortgage applications, lenders abide by rules in handbooks hundreds of pages long. Depending on the loan type you’re seeking, these rules might come from Fannie Mae, Freddie Mac, the U.S. Department of Veterans Affairs (VA), the Federal Housing Administration (FHA) or the U.S. Department of Agriculture (USDA).

On top of those rules, individual lenders may have additional, internal rules they follow. A few lenders only follow their own rules because they plan to hold onto the loans. But most lenders sell their mortgages to Fannie Mae or Freddie Mac, so we’re going to talk about the reasons those entities instruct lenders to reject loan applications. Then, we’ll discuss solutions to your mortgage denial problem.

1. Low Credit Score

You will need a credit score of at least 620 to qualify for a conventional mortgage.

2. Credit Report Errors/Identity Theft

Sometimes, the reason your credit score is too low is that you have an error in your credit report or have had your identity stolen and damaged. The resulting inaccurate information in your credit reports can prevent you from qualifying for a mortgage.

3. No Credit History

If you have no official credit history, you can still qualify for a mortgage using nontraditional credit. Fannie says you can show two to four sources of proof of steady payments not typically reported to credit bureaus, such as rent, insurance or utility payments, and still get approved. But if you have neither traditional nor nontraditional credit, you will not be approved.

4. Too Many Recent Inquiries for New Credit

Lenders will consider you a higher-risk borrower if you have been applying for lots of new credit recently, even if you didn’t accept all the credit you were offered—but especially if you did.

5. Foreclosure

A foreclosure on your credit report means you’ll have to wait three to seven years to be eligible for a conventional loan. The lesser offenses—deed in lieu of foreclosure, short sale, charge-off—require a two- to four-year waiting period.

6. Judgment or Lien

Outstanding judgments and liens must be paid off before closing, so if you don’t have enough funds to pay them, your lender will reject your application.

7. Bankruptcy

Depending on the type of bankruptcy and the conditions that caused it, you will have to wait two to five years after discharge or dismissal to be eligible for a conventional loan.

Still, the shorter end of the range to become mortgage eligible after a foreclosure or bankruptcy applies only to extenuating circ*mstances such as divorce, high medical bills or being laid off from work. Evidence of your misfortune and subsequent turnaround can help you get a mortgage approval sooner.

8. Past-due Payments

Too many late payments will harm your credit score, possibly to the point where it’s too low to qualify. And you can’t get approved while you have overdue payments outstanding.

9. Overdue Mortgage

If you have an existing first or second mortgage that is 60 days or more delinquent, your application may be denied.

10. Debt and Other Liabilities Too High

Add the housing payment you want to take on to all your payments on credit cards, installment loans with more than 10 payments remaining and other debts with recurring payments. Then add any child support or alimony you pay. The total can’t exceed 50% of your income. Depending on your overall financial picture, sometimes the maximum is only 36% or 45%.

When calculating your debt-to-income (DTI) ratio, be aware that your lender’s calculation of your housing payment includes not only the principal and interest you’ll pay on your mortgage, but also homeowner, flood and mortgage insurance premiums, as well as property taxes and homeowners association fees.

11. Student Loan Debt in Forbearance or Deferment

What’s going on when your student loan payment is currently What’s going on when your student loan payment is currently What’s going on when your student loan payment is currently $0 because you’re in forbearance or deferment because you’re in forbearance or deferment because you’re in forbearance or deferment, but your lender says you don’t qualify because of your student loan? How can you get denied based on a payment that’s not affecting your monthly obligations? Since your payment won’t be $0 forever, your lender will factor in a future repayment based on your loan balance and terms.

12. Low Income

Your ongoing, stable income must be high enough to support the housing payment you want to take on after subtracting your ongoing financial obligations (debt and other liabilities).

13. Employment History Too Short or Unstable

Lenders want to see a history of stable and predictable wage or salary income, ideally with at least a two-year history. You also can qualify with many other types of income, including long-term disability, interest and dividends, public assistance and retirement income. If it’s unclear whether you can hold down a job or receive a consistent income, you’ll need to build a longer history.

14. Insufficient Documentation of Income or Assets

Lenders require documents such as pay stubs, W-2 forms, bank statements and tax returns to prove your income and assets. If you can’t provide these documents, your loan will not be approved.

15. Insufficient Reserves

Your lender may require you to show that you’ll have a certain number of months’ worth of housing expenses in checking, savings, investment or retirement accounts after your mortgage closes.

16. Assets Not Seasoned

Large deposits that haven’t been in your account for at least two months can be evidence that you recently borrowed money to afford your down payment or meet reserve requirements. Lenders will require proof of where the money came from—a gift letter from a relative, proof that you just sold your car—to show that’s not the case.

17. Property in Poor Condition

With a standard conventional loan, you can’t finance a property that is unsafe or structurally unsound because it has been damaged or poorly maintained. These issues have to be corrected before a lender’s underwriter can approve a mortgage for the property.

18. Not a U.S. Citizen or Illegally in the Country

You must be a U.S. citizen or legal permanent or nonpermanent resident with a valid Social Security or tax identification number to be approved for a mortgage.

19. Too Young

You must be legally old enough to enter a mortgage contract (age 18 in most states).

20. Insufficient Down Payment

You will typically need a down payment of at least 3% to buy a home with a conventional mortgage. If you can’t afford a down payment, you may be able to apply with Community Seconds or Affordable Seconds financing, however.

21. Last-minute Mistake

It can be devastating to have your mortgage suddenly denied after you thought you were clear to close. If your mortgage loan got denied after you received your closing disclosure, it could be that you made a last-minute mistake like applying for a new credit card, financing furniture for your new home or making some other financial move that threw off your DTI ratio or credit score.

Steps to Take So Your Mortgage Won’t Get Denied Again

Depending on the cause of your mortgage denial, you’ll need to take one or more of the steps below to get approved. The more you can improve, the more likely you are to qualify and to get the best mortgage rates.

Correct Credit Problems

Check your Experian, Equifax and TransUnion credit reports for errors and negative items; you can request a free report through AnnualCreditReport.com. Go through the credit bureau’s dispute resolution process to fix errors. Negative items may require you to catch up on payments or pay off a debt.

If you have no credit and can’t document nontraditional credit, you’ll need to get some accounts in your name and make all your payments on time for at least 12 months. Aside from that, avoid applying for new credit.

Pay Down Debt, Reduce Monthly Obligations

Lessening your monthly expenses gives you more breathing room to make housing payments and deal with large, unscheduled costs like repairing your furnace or replacing your vehicle. Owing less can also improve your credit score.

Increase and Stabilize Your Income

A higher monthly income has a similar effect as paying down debt: it will lower your DTI ratio and improve your chances of approval. However, your income will not affect your credit score, for better or worse. Increasing your time at your job, or at least in the same line of work, also gives lenders more confidence that you’ll repay a mortgage.

Choose a Less Expensive Location or Property Type

We can’t all afford to live in Hawaii, California, New York or other areas with an overall high cost of living. Sometimes the clearest path to homeownership is a significant move to a more affordable area. Another option may be to choose a condo instead of a house, or a home in a development without homeowners association (HOA) fees instead of with or a property or further from an area at major risk of floods or fires.

Increase your Savings

Even if you don’t need much in the way of reserves for the particular loan you’re qualifying for, having plenty of savings can help compensate for weaker areas of your application when it comes to getting approved and securing a competitive rate. If you struggle to save, look for a down payment assistance program or a gift from a friend, relative or employer to help you get to the closing table.

Choose a Better Property or Apply for a Renovation Loan

Sometimes it’s not you—it’s the property that lenders reject. Did you know there are home loans that let you finance the purchase price of a fixer-upper home plus the cost to renovate it? Getting approved might just be a matter of applying for the right loan product, like a HomeStyle Renovation, CHOICERenovation, or FHA 203(k) loan.

When Can You Apply Again?

In some circ*mstances, you should apply again immediately. If your borrower profile is generally good but one or two items are marginal, it’s possible that one lender will approve you even if another will not. It’s also possible that you could get approved for a loan with more lenient qualification requirements, such as an FHA, VA, or USDA loan.

If you’ve shopped around for a home loan and been repeatedly rejected, however, get as much information as you can from each lender about why they rejected your application. Once enough time has passed that you’ve been able to correct those issues—or it’s been long enough since your foreclosure or bankruptcy—then you can apply again with a better chance of approval.