Common Reasons Mortgage Applications Get Denied

For borrowers in today’s expensive housing market, getting approved for a mortgage can be a challenge. Mortgage rates have soared from pandemic-era lows, home values are near record highs and home price appreciation is outpacing wage growth.

All of that means there’s no guarantee a lender will approve your mortgage application. Here’s a look at how lenders decide to extend credit, and some common reasons why mortgage applications get rejected.

How does mortgage underwriting work?

Mortgage underwriting is the process of verifying and analyzing the financial information you provide your lender — all with the goal of giving you an answer of yes, no or maybe. As part of the application, you hand over bank statements, W-2s and other tax documents, recent pay stubs and any additional documentation the lender requires.

Dispense with any stereotypes about the old days of lending or the movie It’s A Wonderful Life, when a banker determined your creditworthiness by the firmness of your handshake and the crispness of your shirt. In most cases, a loan officer or mortgage broker will collect your information and submit it to an underwriting software system. Loans that will be sold to Fannie Mae, for example, use Desktop Underwriter (DU), while loans sold to Freddie Mac leverage Loan Product Advisor (LPA).

Systems like DU and LPA don’t allow for much in the way of human judgment. The software determines whether you’re either approved, rejected or asked for additional information.

Such automated underwriting, as it’s officially called, is the norm nowadays — part of the reforms to the mortgage financing world developed after the 2007–09 mortgage meltdown and subsequent financial crisis. “Prior to the crisis, there was more leeway,” says Bill Banfield, chief business officer at Rocket Mortgage. “Now, most of that subjectivity is gone.”

There are many reasons — from your income to the type of property you’re buying — that you could see your mortgage declined by underwriter software. And if it does, there may be little the human loan officers can do about it.

Reasons for mortgage denial

“There are a thousand potential questions Fannie [or Freddie] could return,” says David Aach, chief operating officer at Blue Sage Solutions, a mortgage technology firm. “That’s the nightmare of the underwriting process.” Here are some of the more common reasons underwriters reject mortgages.

1. You have credit issues

Your credit score is the single most important factor in determining your mortgage rate – and whether you get approved at all. Generally, the best deals go to borrowers with credit scores of 740 or above, and ones in the “good” range — 670 to 739 — are the most desirable.

You can qualify for some types of mortgages with much lower scores than others. For instance, VA loans are generally available to borrowers with scores of 620 or above, while loans backed by the FHA can go to those with scores as low as 500.

Before applying for a mortgage, check your credit score and credit report and dispute any errors. If your credit score is low, work on boosting it before you apply (for example, you could ask a card company to increase your credit line, which automatically lowers your credit utilization ratio). If you have a qualifying credit score, make sure you don’t do anything during the mortgage process to cause it to drop, like miss a payment, max out a credit card or apply for some other new loan.

If you don’t have a credit score at all, some lenders do have alternative credit scoring methods, such as analyzing your bank deposits. In fact, in January 2025, Fannie Mae released a new update to DU in support of “increasing access to credit for populations such as those with limited or no credit histories.”

2. You have an income shortfall

Your debt-to-income (DTI) ratio — the portion of your gross (pre-tax) monthly income spent on repaying regular obligations — signals to lenders whether you’re in a position to take on an additional major debt. If your DTI is too high, you may be rejected for a mortgage. Most lenders require a DTI of less than 43 percent. Some will go up to 50 percent if you have factors to offset that higher DTI, like a big savings account.

Aim for your payment obligations to make up about one-third of your income: A DTI around 36 percent is the ideal, qualifying you for better loan terms. If you owe a lot in student loans, car loans or credit card balances, work on bringing those balances down before applying for a mortgage.

Also, think about the length of the loan: The longer its term, the more affordable its monthly payments. So, opting for a 30-year mortgage might lower your chances of getting your mortgage declined by underwriter software. Keep in mind, though, that you’ll pay more in interest over the loan’s lifespan, compared to shorter-term loans.

On the income side, issues often emerge when the mortgage applicant is self-employed. The software is geared to W-2s — the wage-and-tax-statement from an employer — and might flag your file when you use alternative ways to prove your income. It might also cause an issue if your income stream is irregular, even if your earnings are high.

Also, business owners often maximize write-offs and expenses when doing their taxes — but that common practice flummoxes the underwriting models. “Self-employed people know what they make, but they don’t know what an underwriter is looking for,” says Tom Hutchens, president at Angel Oak, a lender specializing in non-qualified mortgage (QM) loans (mortgages outside the conventional criteria). “They might be fully approved, but then an underwriter looks at the tax returns” and sees that “$10,000 a month might become $5,000 a month in income.” The lower amount upsets the software, which then dings the applicant.

3. The loan-to-value (LTV) ratio is too high

Lenders also look at how much of a mortgage you want vis-à-vis the value of the home you’re buying — something called the loan-to-value (LTV) ratio.

The bigger your down payment, the less you borrow, and the lower your LTV. For instance, if you’re buying a $400,000 house with a down payment of $80,000, your LTV is a comfortable 80 percent. But if you’re putting down $20,000 and financing the remaining $380,000, the LTV is up to 95 percent. (While there’s no single perfect LTV percentage, lenders usually like to see it around or below 80 percent — for conventional loans, anyway.)

Low down payments are one of the big reasons for mortgage denial. The higher your LTV, the higher the likelihood that your loan will be flagged for follow-up questions, or rejected altogether. If you feel you need help lowering your LTV, look into down payment assistance — every state has these programs, especially for first-time buyers — to increase the amount of cash you can bring to the deal.

4. You’re trying to finance an out-of-favor property

Not all homes are created equal, as far as lenders are concerned. The traditional, detached single-family residence still rules, and alternatives can confound.

Condos are one particularly tough type of home to finance. In response to the June 2021 collapse of an oceanfront tower near Miami, Fannie and Freddie rolled out new rules covering condo loans. The giant mortgage market-makers have decided not to finance some buildings that have low reserves, need repairs or are facing lawsuits. Critics say the stricter reviews are causing condo sales to fall apart, even in buildings with no structural issues.

Manufactured homes also can be challenging to finance. And if appraisers or inspectors find a structural flaw or other issue with the home itself, that also can slow the approval, or even kill it.

5. Something recently changed in your financial life

The lending process prizes financial stability and predictability (remember what we said about income, above). Unfortunately, a recent job change or period of unemployment can throw a wrench in your approval. A short employment history or interruption in earnings sends warning signals to the software, too.

Unusual activity in your bank account can be another issue, even if it grows your cash reserves. Large, unusual deposits might indicate you borrowed money for your down payment — which you may need to repay along with your mortgage. If you got money from relatives to help you buy a house, make sure to submit a gift letter as part of your application.

6. You don’t meet the loan program’s requirements

Different types of loans come with different specifications.

If you want to get an FHA-insured loan, for example, your house can’t exceed the loan limit applicable to the location. In 2025, that is $524,225 in most areas. The house also needs to pass a special type of appraisal that looks at the property’s condition. The specifics put in the place by the FHA add more potential reasons for mortgage denial.

Similarly, loans backed by the VA and the USDA have their own unique requirements.

On top of all of this, lenders generally have their own proprietary guidelines. Failing to meet any of them can lead to your mortgage application being denied.

7. You’re missing information on your application

Make sure to fill out the mortgage application in its entirety. If it’s incomplete, the underwriting software might discard your application, resulting in an automated rejection.

How to get a mortgage after your application is denied

Take heart: If you are denied a mortgage, all is not lost. There are workarounds to many of these issues.

If you have a unique income situation, such as owning a business with unsteady cash flow, you might apply for a non-QM mortgage. These loans come with more flexible credit criteria and income requirements than conventional loans, making them ideal for those who don’t fit within the standard borrower box.

If your credit score or LTV was the problem, you can also consider loans backed by the FHA or VA. Their terms are more generous, geared toward borrowers with lower credit scores or little cash for down payments.

Manual underwriting

The vast majority of conforming loans — those eligible to be bought by Fannie and Freddie — are decided via automatic underwriting. It’s fast, cheap and takes bias out of the process. But some loans are still reviewed by a human. Lenders often do manual underwriting when an application would likely be denied through an automated system, or if the borrower has some unusual circumstances but is otherwise qualified.

Certain types of mortgages, like jumbo loans and non-QM loans, are more likely to be manually underwritten. But you can request it for any mortgage, if you believe your particular situation will not be fully understood by the software. Be prepared to supply additional paperwork — financial statements reaching farther back, for example — and for a longer process. Bear in mind that, even with a manual underwriter, your loan still has to conform to specific requirements.

Bottom line

The mortgage application process can be full of surprises — with a key one being that an automated underwriting system often decides your approval or denial. The key reasons underwriters reject mortgages often involve credit score issues, income shortfalls, high LTV ratios, property type or recent changes in your financial situation. But the software doesn’t necessarily have to have the last word.

Find out why your application was denied, and then seek remedies. You can explore alternatives to conventional conforming loans, or request manual underwriting (a review by a human underwriter), for example. Any of these may provide a pathway to homeownership.

FAQs

• How long do underwriters take to approve a mortgage?
  

  It depends on the lender, the tools they use and how good you were at providing the required information. On average, it takes about 44 days to close a new-purchase mortgage.

• How worried should I be about underwriting?
  

  Not very. Take steps before you approach lenders — like paying down other debts and improving your credit score — and you should feel confident when applying. If you’re still nervous, you can explore prequalification before you seek preapproval. This is a less stringent process that can give you an idea of where you stand.

• What are some things I should not do during underwriting?
  

  To avoid a mortgage declined by underwriter teams, do two things. First, don’t make any financial changes. Keep paying your bills on time and don’t open any new loans or lines of credits. Second, stay responsive. The lender might ask for additional information. If you don’t provide it in a timely manner, it can lead to denial.