Common reasons why mortgage applications get denied – Orange County Register

By Jeff Ostrowski, Bankrate.com

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.

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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).

Fannie Mae and Freddie Mac are government-sponsored enterprises that interface with lenders to keep the mortgage market stable. Between them, they buy or back about two-thirds of all U.S. home loans.

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.

Keep in mind: Beyond your approval or denial, the main thing the lender decides during underwriting is your mortgage’s interest rate. They also use underwriting to determine how much to charge you in fees.

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%. Some will go up to 50% 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% 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.