For debtors in in the present day’s costly housing market, getting authorised for a mortgage generally is a problem. Mortgage charges have soared from pandemic-era lows, house values are close to file highs and residential value appreciation is outpacing wage development.
All of which means there’s no assure a lender will approve your mortgage software. Right here’s a take a look at how lenders resolve to increase credit score, and a few widespread the reason 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 providing you with a solution of sure, no or perhaps. As a part of the appliance, you hand over financial institution statements, W-2s and different tax paperwork, latest pay stubs and any further documentation the lender requires.
Dispense with any stereotypes concerning the previous days of lending or the film “It’s A Fantastic 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 likely be bought to Fannie Mae, for instance, use Desktop Underwriter (DU), whereas loans bought 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. house loans.
Programs 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 authorised, rejected or requested for extra data.
Such automated underwriting, because it’s formally known 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 revenue to the kind of property you’re shopping for — that you would 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.
Be mindful: Past your approval or denial, the principle factor the lender decides throughout underwriting is your mortgage’s rate of interest. Additionally 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) might 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 among the extra widespread causes underwriters reject mortgages.
1. You could have credit score points
Your credit score rating is the only most vital think about figuring out your mortgage price – and whether or not you get authorised in any respect. Typically, the very best offers go to debtors with credit score scores of 740 or above, and ones within the “good” vary — 670 to 739 — are essentially the most fascinating.
You’ll be able to qualify for some varieties of mortgages with a lot decrease scores than others. As an example, 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 would ask a card firm to extend your credit score line, which mechanically lowers your credit score utilization ratio). When you 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.
If you happen to don’t have a credit score rating in any respect, some lenders do have different credit score scoring strategies, equivalent to analyzing your financial institution deposits. In truth, in January 2025, Fannie Mae launched a brand new replace to DU in help of “rising entry to credit score for populations equivalent to these with restricted or no credit score histories.”
2. You could have an revenue shortfall
Your debt-to-income (DTI) ratio — the portion of your gross (pre-tax) month-to-month revenue spent on repaying common obligations — indicators to lenders whether or not you’re able to tackle an extra main debt. In case your DTI is just too excessive, you could be rejected for a mortgage. Most lenders require a DTI of lower than 43%. Some will go as much as 50% in case you have elements to offset that greater DTI, like a giant financial savings account.
Purpose on your cost obligations to make up about one-third of your revenue: A DTI round 36% is the perfect, qualifying you for higher mortgage phrases. If you happen to owe quite a bit 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 inexpensive its month-to-month funds. So, choosing a 30-year mortgage may decrease your probabilities of getting your mortgage declined by underwriter software program. Be mindful, although, that you simply’ll pay extra in curiosity over the mortgage’s lifespan, in comparison with shorter-term loans.
On the revenue 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 may flag your file while you use alternative routes to show your revenue. It may additionally trigger a difficulty in case your revenue stream is irregular, even when your earnings are excessive.
Additionally, enterprise homeowners 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 on the lookout for,” says Tom Hutchens, president at Angel Oak, a lender specializing in non-qualified mortgage (QM) loans (mortgages exterior the traditional standards). “They could be absolutely authorised, however then an underwriter seems on the tax returns” and sees that “$10,000 a month may change into $5,000 a month in revenue.” The decrease quantity upsets the software program, which then dings the applicant.
3. The loan-to-value (LTV) ratio is just too excessive
Lenders additionally take 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 known as the loan-to-value (LTV) ratio.
The larger your down cost, the much less you borrow, and the decrease your LTV. As an example, should you’re shopping for a $400,000 home with a down cost of $80,000, your LTV is a cushty 80%. However should you’re placing down $20,000 and financing the remaining $380,000, the LTV is as much as 95%. (Whereas there’s no single excellent LTV proportion, lenders often prefer 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 chance that your mortgage will likely be flagged for follow-up questions, or rejected altogether. If you happen to really feel you need assistance decreasing your LTV, look into down cost help — each state has these applications, particularly for first-time consumers — to extend the amount of money you may deliver to the deal.
4. You’re making an attempt to finance an out-of-favor property
Not all houses are created equal, so far as lenders are involved. The standard, indifferent single-family residence nonetheless guidelines, and options can confound.
Condos are one notably powerful kind of house to finance. In response to the June 2021 collapse of an oceanfront tower close to Miami, Fannie and Freddie rolled out new guidelines protecting 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 critiques are inflicting rental gross sales to disintegrate, even in buildings with no structural points.
Manufactured houses additionally may be difficult to finance. And if appraisers or inspectors discover a structural flaw or different problem with the house itself, that can also gradual the approval, and even kill it.
5. One thing not too long ago modified in your monetary life
The lending course of prizes monetary stability and predictability (keep in mind what we mentioned about revenue, 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 may be one other problem, even when it grows your money reserves. Giant, uncommon deposits may point out you borrowed cash on your down cost — which you’ll have to repay alongside along with your mortgage. If you happen to bought cash from relations that can assist you purchase a home, be sure that to submit a present letter as a part of your software.
6. You don’t meet the mortgage program’s necessities
Several types of loans include totally different specs.
If you wish to get an FHA-insured mortgage, for instance, your home can’t exceed the mortgage restrict relevant to the placement. In 2025, that’s $524,225 in most areas. The home additionally must move a particular kind 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 that to fill out the mortgage software in its entirety. If it’s incomplete, the underwriting software program may discard your software, leading to an automatic rejection.
How one can get a mortgage after your software is denied
Take coronary heart: In case you are denied a mortgage, all is just not misplaced. There are workarounds to many of those points.
When you have a novel revenue state of affairs, equivalent to proudly owning a enterprise with unsteady money stream, you may apply for a non-QM mortgage. These loans include extra versatile credit score standards and revenue necessities than standard loans, making them ultimate for individuals who don’t match inside the usual borrower field.
In case your credit score rating or LTV was the issue, you can too contemplate 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.
Guide underwriting
The overwhelming majority of conforming loans — these eligible to be purchased by Fannie and Freddie — are determined by way of automated 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 handbook underwriting when an software would probably be denied by an automatic system, or if the borrower has some uncommon circumstances however is in any other case certified.
Sure varieties of mortgages, like jumbo loans and non-QM loans, usually tend to be manually underwritten. However you may request it for any mortgage, should you consider your explicit state of affairs is not going to be absolutely understood by the software program. Be ready to produce further paperwork — monetary statements reaching farther again, for instance — and for an extended course of. Keep in mind that, even with a handbook underwriter, your mortgage nonetheless has to adapt to particular necessities.
Backside line
The mortgage software course of may be filled 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, revenue shortfalls, excessive LTV ratios, property kind or latest adjustments in your monetary state of affairs. 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 handbook 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 is determined by the lender, the instruments they use and the way good you have 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 enhancing your credit score rating — and it is best to really feel assured when making use of. If you happen to’re nonetheless nervous, you may discover prequalification earlier than you search preapproval. This can be a much less stringent course of that may give 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 adjustments. Hold paying your payments on time and don’t open any new loans or traces of credit. Second, keep responsive. The lender may ask for extra data. If you happen to don’t present it in a well timed method, it will probably result in denial.
