How Often Does An Underwriter Deny A Loan?

How often does an underwriter deny a loan?

A mortgage underwriter typically denies about 1 in 10 mortgage loan applications. A mortgage loan application can be denied for many reasons, including a borrower’s low credit score, recent employment change or high debt-to-income ratio.

We'll go over the underwriting process in more detail, explore several reasons a borrower may not succeed in the underwriting process, and what to do about it.

What Is Underwriting?

Mortgage underwriting, a critical part of the home purchase process, means you undergo a check on your financial health. Underwriting gives your lender a perspective on your ability to repay your loan.

Your lender will ask for specific information about your income, assets and employment to make sure you can afford the payment for the home you want to purchase or refinance.

Your lender will check on your credit, income and assets, which involves a comprehensive check on certain aspects of your finances, including:

• Credit: How well you've borrowed and repaid money in the past, and the amount of debt you currently have. You'll need a credit score of 620 or better to obtain a conventional loan. The requirement may not be as high for other loan types.
• Income: The amount of money you bring into your household. Your lender will request documentation required by your loan type. This could include but is not limited to your W-2s from the previous 1 or 2 years, recent pay stubs and bank statements. If you're self-employed, you may need to show other proof, such as recent tax returns.
• Assets: This refers to the type of funds you have access to. This includes investments, retirement funds, cash in savings and checking accounts and more.

Your lender will also ensure the home you want to buy is worth the sales price in the form of an appraisal. During an appraisal, an appraiser determines the fair market value of your home. They look at certain aspects of the house, including the living condition of the home and home improvements you've made. Appraisers also evaluate nearby home values, which means looking into other homes near yours that have similarities to the home you plan to purchase. They'll look at current property values and what the other homes sold for in the area.

Should You Be Worried About Underwriting?

You shouldn't worry about underwriting if you meet the requirements for your loan type. Getting an initial approval helps because it gives you an idea of what you can afford – a lender uses your credit report, income, assets and debts to make a preliminary assessment of your qualifications.

Look at some loan types and basic qualifications:

• Conventional loans: Conventional loans generally require a minimum credit score of 620 and a debt-to-income ratio no larger than 50%. A debt-to-income ratio explores the relationship between your debt amount relative to your income. They will also consider your financial and physical assets to get a conventional loan.

On the other hand, government-insured loans have different minimum requirements. 

• FHA loans: FHA loans, backed by the Federal Housing Administration, require a credit score of at least 580 with most lenders, though you can get approval with as low as a 500 credit score. You can also qualify with a down payment of just 3.5% if you have at or above a 580 credit score.
• USDA loans: USDA loans, backed by the U.S. Department of Agriculture, must go to residents of designated rural areas. You cannot exceed 115% of the area's median household income and can qualify with a 640 credit score with most lenders who offer the program.
• VA loans: VA loans, backed by the U.S. Department of Veterans Affairs, go to qualifying members of the military, veterans and surviving spouses. You can qualify for a VA loan with a credit score as low as 580 with most lenders, though you should typically have a credit score between 580 and 650. You can also qualify with a higher DTI and do not have to have a down payment.

Jumbo loans are another option. Unlike conventional loans, they do not meet conforming loan limits set by Fannie Mae or Freddie Mac. They exceed the conforming loan limits of $726,200 in 2023 ($1,089,300 in Alaska and Hawaii). Jumbo loan lenders require a minimum down payment as high as 20% and a credit score of at least 680.

Can An Underwriter Deny A Loan?

An underwriter can deny a mortgage loan application for one reason or multiple reasons. However, you can take steps to keep that from happening.

You can get approval for a mortgage, check on your credit score and credit history, ensure that you have steady income coming into your household, and examine your assets to ensure that you have enough saved in case you need to dip into your excess cash to make your monthly mortgage payments.

6 Reasons Your Mortgage Loan May Be Denied In Underwriting

Why would an underwriter deny a loan? A prospective home buyer's loan might be denied during the underwriting process for various reasons, including the following.

1. Low Credit Score

A low credit score can keep a home loan from being approved in underwriting. A credit score, which ranges between 300 – 850 (850 being the highest possible score) is made up of many factors including but not limited to: Your payment history (how well you've made your payments in the past), the amount of debt you owe, credit utilization (the amount of available credit you have compared to the amount you use), the amount of time you've used credit, types of credit (such as student loans, auto loans, credit cards, mortgages, etc.) and inquiries (when other companies make inquiries into your credit).

Recent credit behavior may also play a role in a decision to deny you. For example, if a borrower suddenly charges a credit card a number of times or applies for numerous other types of loans, they may be denied a mortgage loan in underwriting.

2. High Debt-To-Income Ratio

A high debt-to-income ratio (DTI) can affect a loan and potentially lead to a home loan being denied. Each loan program has a maximum DTI ratio that may vary lender to lender. You can calculate your DTI by totaling your minimum recurring monthly debt payments, adding up your total monthly income, dividing your debt by your income and multiplying the result by 100.

3. Problems With A Property

Issues with a property can make a loan more likely to be denied during underwriting. A home inspection could reveal major issues like foundation problems, so consider getting an inspection on the home early on to help you avoid any unwanted surprises.

4. Employment Change

It's important to showcase evidence of a steady income when applying for a mortgage. Mortgage lenders like to see whether a potential borrower is financially stable enough to afford monthly mortgage payments. If you like to job hop or otherwise can't prove that you have a steady income, a lender may worry that you can't make your mortgage payments reliably. Many mortgage lenders require you to show 2 years of employment history.

5. Low Appraisal

A low appraisal can affect a loan approval and cause it to be denied during the underwriting process because a lender cannot lend more to a borrower than the loan program allows. For example, the appraisal comes back a lot lower than the sales price of the home, the buyer would have to pay the difference or renegotiate to a lower price.

6. Financial Issues

An underwriter might deny a mortgage loan if you present other financial issues, such as unusual bank account activity or missed mortgage payments in the past. For example, if a potential applicant recently spent all their money out of their bank account or if the lender finds that they have had recurrent missed mortgage payments, they may not get approved for a loan in the underwriting stage.

What To Do If An Underwriter Denies Your Loan

If you receive a denial, here's what you can do:

• Improve credit score: You can do several things to improve your credit score, including checking your credit report for errors (like accounts that don't belong to you, erroneous open accounts, etc.), repaying your loans and reducing high-balance accounts.
• Make a larger down payment: You can make a larger down payment to prove you're a less risky borrower. The more you put toward your loan upfront, the lower the loan-to-value (LTV) ratio will be. Making a larger down payment potentially reduces your monthly payment, in turn reducing your DTI.
• Ask someone to co-sign: A co-signer agrees to take on the financial responsibility of a loan if the primary borrower cannot fulfill their responsibility to make their mortgage payments. Understanding the obligations of co-signing is important because both parties' credit could be affected.
• Look for a new home: You may want to start from scratch. Consider looking for a less expensive home. Consider getting a real estate agent involved in the process.

The Bottom Line

An underwriter might deny a loan for many reasons, but there’s no reason to be discouraged or give up if this happens. Use the tips outlined above to improve your chances of getting approved after a denial.

Are you ready to get started on your home-buying journey? Connect with a Rocket Homes^SM Verified Partner Agent.