Mortgage loan denial reasons and tips to help you get approved

According to the 2023 Fannie Mae Mortgage Understanding Study, 19% of consumers don’t think they would be qualified to obtain a mortgage if they tried. Worried about passing the approval process? Review some common reasons people aren't approved for a mortgage and some tips on what to do if you receive a denied mortgage loan.

Common reasons for mortgage loan denial

Your credit score is too low

A good credit score may be the key to securing a mortgage. Pulling your own credit report, also known as a soft inquiry, doesn't affect your credit score. In fact, regularly checking your credit report is a responsible financial practice. You are entitled by law to one free report from each of the three reporting bureaus – Equifax, Experian and TransUnion – every 12 months. Keep in mind: If a lender pulls your score to approve a new credit account, it is considered a hard inquiry and may lower your credit score. You typically have to authorize this process. The most effective way to positively influence your credit score is to pay your debts on time.

You have too much debt

The sum of your debt payments each month, including your current mortgage, should be less than 35% to 40% of your total monthly income. A solid strategy to help lower debt is to make a plan to pay it off. Remember that closing a credit account lowers your available credit, which can increase your credit utilization ratio and lower your credit score, especially if you have outstanding balances on other cards. Additionally, avoid hiding debt that you have. Lenders have several ways of discovering your undisclosed debt and leaving it off could factor into your loan denial.

Your loan-to-value ratio (LTV) doesn’t match

The LTV ratio is a lending risk assessment ratio lenders use to determine whether to approve your mortgage loan. It specifically refers to the ratio of the loan amount to the home’s appraisal value. Ask your lending institution the maximum LTV they’ll accept and calculate your possible line of credit if you suspect this was the cause of your mortgage decline. If your LTV is too high, consider seeking out a second appraisal or a different lender. If you buy a home, it shouldn't cost more than two to two and a half times your household income, and if possible, your mortgage should be no more than 80% of the home's value to avoid paying mortgage insurance. It may be possible to include a contingency clause in your purchase agreement that allows you to back out if your loan falls through, the home doesn't appraise at its sale price or you lose your job.

You've applied for too many credit cards

While you might not need to close accounts, applying for a mortgage within six months of applying for a different type of credit may influence your credit score. Analyze your situation prior to opening several accounts in succession. Multiple credit inquiries and opening too many accounts quickly can take points off your credit score. This particularly applies to those with few credit accounts or a short credit history.

You have spotty employment history or big income shifts

Consistency is key: Lenders usually request at least two years of tax returns so they can meet regulatory guidelines to verify stable employment and income. Before you start your home search, meet with a lender or mortgage broker to determine how much money you are qualified to borrow. Having a pre-qualification letter in hand can make things easier for you, the seller and your real estate agent.

You don't have a down payment

Without 3% to 20% of the purchase price saved, there may be approval snags. The amount you'll need for your down payment will vary depending on the size of home, its location and the type of mortgage you seek. Some lenders may offer loan programs with low down payment options, but may require mortgage insurance, usually called Private Mortgage Insurance (PMI). This helps protect the financial institution if you fail to make loan payments. Keep in mind that this will increase your total monthly obligation.

The house you want to buy has issues

If the home you want has one or more major issues, your loan is much more likely to be denied. Consider conducting an inspection early on to help avoid surprises when applying.

Lack of payment history

If you’ve previously owned a home, your underwriter will check to see that you have demonstrated a history of making payments in full and on time. If you don’t, know that this may be a determining factor in their decision-making process.

You have unusual bank activity

Large deposits can often raise concerns for lenders as they may indicate that you’ve taken out a loan to cover your down payment, which could increase your debt-to-income (DTI) ratio. Lenders need to confirm you have enough funds to cover expenses like insurance premiums, taxes, closing costs and homeowners association (HOA) fees.

How often are mortgage loans denied?

According to data reporting by the Consumer Financial Protection Bureau (CFPB), around 34% of originated loans were denied in 2024. If you find yourself in that category, read on for some tips on how you might be able to turn your situation around.

What to do if your mortgage loan is denied

If you receive a mortgage loan denial letter, try not to lose hope as there are still options available to you.

Understand why your loan was denied

• If your debt-to-income ratio was too high, you can start making progress on paying down your debt which can lower your ratio before returning to the application process.
• If your credit score was too low, work on making your payments on time, put some money down on outstanding debt and check your credit report for errors.
• If your loan-to-value ratio is too high, take some time to save up for a larger down payment. You’ll need at least three- to three-and-a-half-percent down depending on your loan.

Additional options

• Ask someone to cosign. Federal Housing Administration (FHA) loans allow someone who doesn’t live in the home to cosign on the mortgage and contribute their income. Note that the cosigner will be responsible for the mortgage if you are unable to meet your payments, and missed payments will negatively impact their credit score.
• Write a letter of explanation. These may help clarify points that have more nuance such as gaps in employment or large cash deposits. If you feel this could benefit you, make your statement detailed to give yourself a better chance of proving you can repay your loan.
• Have your information ready. The quicker you can get your documents and information to the lenders, the better your chances of success are. Requested documentation frequently includes tax returns and W2s from previous years, recent bank statements, your property tax bill, your insurance bill and your most recent pay stubs.
• Look into other mortgage programs. You may be able to find other programs whose requirements match your situation. As a start, seek out programs backed by the FHA, they offer lower credit score requirements in some cases.
• Consider properties in a lower price range. If all else fails, it may be time to look for something in a lower price range that you can more easily afford. This may allow for more budget flexibility and easier loan payments, which when combined with on-time payments, can give you a leg up on your next investment.

To prepare for another try, thoroughly review your finances, save as much as you can and get pre-qualified before you view the “For Sale” listings. Once you feel you’re in a good spot, it’s house hunting time!