11 Reasons Why Your Mortgage Was Denied [& How to Prevent It From Happening Again]

According to the Federal Reserve Bank of New York, the average rejection rate for mortgage applications reached 20.7% in 2024, an 8.6% increase from 2023. Getting pre-qualified for a mortgage can help reduce your risk of being denied a home loan because it involves a preliminary assessment of the factors lenders use to determine your eligibility, including your credit score, employment history, monthly income, debt-to-income (DTI) ratio, and any assets in your name.

It’s important to note, though, that pre-qualification does not guarantee loan approval. The official loan underwriting process is extensive, and underwriters might uncover issues that were overlooked during pre-qualification. The only thing you can do in this situation is stay the course: Don’t make any major changes to your finances or lifestyle once you’ve initiated the application process.

Mortgage denials often signal a number of red flags that appear during the underwriting. Here are some warning signs that your application, or the property you’re buying, could put your loan approval at risk:

Poor or Insufficient Credit History

Your credit history is just one piece of the puzzle lenders use to determine whether you’re a risky investment. Underwriters review not only your minimum credit score, but also whether you have any derogatory marks on your credit report, such as a foreclosure or bankruptcy.

While exact requirements vary by loan type — for example, lenders won’t grant a conventional loan to borrowers with a FICO score below 620, or an FHA loan to borrowers with a score below 500 — poor credit history is one of the most common reasons would-be buyers are denied a home loan.

Things that can negatively affect your credit score include:

• Applying for new credit
• Missed payments
• Closed accounts
• Reduced credit limits
• Credit report inaccuracies

Another red flag for lenders is insufficient credit history. Having too few credit accounts (three to five is the gold standard), limited credit activity, accounts that are 6 months old or less, or no credit history at all prevents lenders from getting an accurate read of your reliability, which could lead them to deny your loan application.Are you a first time buyer? Learn why credit matters and the minimum credit requirements for different loan types in this blog post.

High Debt-to-Income Ratio

Your DTI shows how much of your monthly income goes toward paying off debts. You can calculate your DTI by adding up your various expenses (car payments, student loans, rent, and so on), dividing it by your pre-taxable income, and multiplying by 100 to get a percentage. Anything above 35% is considered relatively high, while a DTI of 50% or higher is cause for financial concern.

Borrowers with a high DTI are considered risky — and often denied home loans — because it calls into question whether they’ll be able to make scheduled payments and could lead to them defaulting on the loan.

Missing Documentation

When reviewing your loan application, an underwriter will carefully pore over every document and detail to get a complete picture of your financial health and ability to make consistent on-time loan repayments.

Forgetting to attach even a single pay stub could raise questions about your finances and cause your mortgage application to be denied. Discrepancies or information that can’t be verified are also likely to raise red flags, so you’ll want to confirm that every piece of information you submit is complete and accurate.

Make sure you have all the documents you need to successfully complete your mortgage application with our free checklist.

Undisclosed Debt

Many borrowers make the mistake of opening up a new line of credit after submitting their mortgage application, assuming that it won’t impact their chances of approval. That’s where they’re wrong. Every new debt that you take on during the loan origination process, from the moment you submit your application through to closing, is automatically considered undisclosed debt, since you didn’t include it in your original documentation.

A single undisclosed debt can increase your DTI by 3%, causing serious problems for lenders, so avoid signing up for a new credit card, leasing a new vehicle, or even offering a personal loan until the dust has settled and you’ve closed on your new home.

Unexplained or Unverifiable Income

Underwriters need to be able to verify the source of your income to:

• Ensure you have the means to afford monthly loan repayments
• Identify any undisclosed debt
• Confirm that your funds come from legal, legitimate sources
• Rule out the possibility of money laundering or other forms of mortgage fraud

Any income or large deposits not accounted for in your W-2 or 1099, federal income tax returns, current pay stubs, or a gift letter could raise questions — even if the funds are legitimate — and cause you to be denied.

Insufficient Down Payment

The lower your down payment, the greater the percentage of your purchase you’ll need to finance, which makes you a risk in the eyes of lenders. While certain loans allow you to put as little as 3.5% down (provided you have a healthy credit score), the general expectation is that you pay 20% of the home’s purchase price.

You can use this worksheet to figure out how much you can afford to set aside for your down payment.

Changes in Income or Employment

Underwriters look for consistency, especially when it comes to earnings and employment. Any changes to either within the past two years can call your financial stability into question. Examples include employment gaps, career changes, changes in job status (from full-time to part-time), or contracting work with a finite end date that predates the loan term.

Large Last-Minute Purchases

Large purchases — any purchase that will incur a monthly debt or drain your cash reserves — give lenders cause for concern, as they could point to any number of potential issues, such as a higher DTI, financial irresponsibility, or an influx of funds from an illegitimate source.

Low Appraisal Value

Most lenders require an appraisal, which protects them by confirming that the home is worth what you’ve agreed to pay. If the appraisal comes in low, the lender may deny the mortgage because the property doesn’t provide enough collateral for the loan amount, especially if the shortfall pushes your loan-to-value (LTV) ratio too high. If this happens, your options are to renegotiate the purchase price, pay the difference in cash, request a reconsideration of value with stronger comparable sales, or switch to a different property that better supports the loan amount.

High Loan-to-Value Ratio

Your LTV ratio compares the size of your loan to the value of the home, and it’s one of the clearest indicators of risk to lenders. A high LTV means you’re putting less money down, which increases the lender’s exposure if you default on the loan; it can also lead to higher interest rates, required mortgage insurance, stricter underwriting, or outright denial.

Structural Issues With the Property

Most loans, including FHA loans, VA loans, USDA loans, and even conventional loans, impose minimum property requirements (MPRs). These are baseline standards lenders set to ensure the property is safe, secure, and structurally sound. MPRs for government-backed loans tend to be stricter than their conventional counterparts, and factors such as faulty electrical wiring, high radon levels, broken windows, sloping floors, poor drainage, and defective or non-functional utility systems can disqualify a property, causing your mortgage to be declined.

A mortgage denial can feel like the rug got pulled out from under you, but it doesn’t need to be the end of your home ownership dreams. The key is figuring out whether the lender’s concern was due to your finances or the home itself.

If your appraisal came in too low or the property didn’t meet the lender’s MPRs, you might be better off renegotiating the purchase price, requesting repairs to the home, or moving on to a different property rather than starting the mortgage process over from scratch.

If you were denied for financial reasons, you might be tempted to jump right back in and apply to a different lender, but rushing into a second application can add new credit activity, plus you’ll still run into the same underlying issues. Instead, slow down and do the following:

1. Request a mortgage rejection letter from your lender.

Your first call should be to your lender to request an adverse action notice or mortgage rejection letter (if they haven’t already provided one). This document puts the underwriter’s reason for declining your application in writing, whether that’s poor credit, debt obligations, income instability, incomplete documentation, or something else entirely. You can use this information to get your ducks in a row and set yourself up for success when you reapply.

2. Contact your loan officer.

Your second call should be to your loan officer, who can review your rejection letter and tell you exactly where your application ran into trouble and what options are available to you. They translate underwriting into plain English and can even help you determine whether the issue is something you can address within your current purchase timeline, so you pick back up where you left off rather than start the application process from scratch.

3. Gather and review your paperwork.

Mortgage approvals depend heavily on documentation. Underwriters carefully review and verify income, assets, and debts, so even small gaps can contribute to delays and even denials.

With help from your loan officer, pull together the documents you submitted and look at them with fresh eyes. Are there any missing pages or uploads that were unreadable? Were there any mismatched details? Pay special attention to bank statements, pay stubs, and anything you might use to explain your income, credit history, or down payment funds. If something is legitimate but looks unusual — for example, gift funds from a relative — provide a short written explanation and supporting documents to clear things up.

4. Meet with a housing counselor.

If you were denied a home loan due to affordability issues, debt, or poor credit, the Department of Housing and Urban Development’s (HUD) housing counseling services could be a helpful resource to you. An HUD-approved counselor can help you build a simple plan to get mortgage-ready, with steps you can actually follow and a timeline that makes sense.

A counselor can also help you prioritize. For example, paying down certain balances can make a bigger difference than paying off a small account, and improving your cash reserves may strengthen your overall application.

5. Consider alternatives.

There are many different paths to homeownership. If your mortgage was declined, there may still be other paths available to you that are a better fit. The right option will depend on why your application was denied, how soon you want to buy, and how flexible the seller is.

Here are a few alternatives to explore:

• Other loan types: If the original loan type you chose isn’t a good fit for your situation, consider another. For example, if you have a healthy credit score but not much money set aside for a down payment, you’d be better suited for an FHA loan, which allows you to put as little as 3.5% down, rather than a conventional loan. Switching loan types can sometimes solve a problem that feels like a dead end with the current program. Your loan officer can explain which programs you qualify for and what the tradeoffs might be.
• Seller financing: While uncommon, the seller might be willing to accept payments directly from you rather than requiring a traditional mortgage. This path to homeownership can work under the right conditions, but it’s important to get the terms in writing and have an attorney review the agreement so everyone is protected.
• Rent-to-own: Rent-to-own gives you time to improve your finances while keeping the goal of buying a home firmly in sight. Contract details are critical here, so make sure you understand how the price is set, what fees you’ll pay up front, whether any portion of your rent will go toward the purchase, and what happens if you decide not to buy.
• Co-signer: A co-signer with strong credit and a stable income could strengthen your application. It’s a serious commitment because the co-signer is responsible for the payment if you can’t make it, so it works best when everyone is fully comfortable with the risk and understands the plan.

6. When you’re ready, reapply. You’ll know you’re ready when you’ve addressed the specific reason(s) you were declined. That might mean lowering your monthly debt payments, uploading additional income documentation, building up your savings, correcting credit report errors, or waiting a little longer after changing jobs so your income looks more consistent on paper.

If the issue was the home itself, choosing a different property may be your best bet. A home that appraises at the right value and meets MPRs w

If you’re just starting out on your home buying journey, the easiest way to get approved for a mortgage is to be fully prepared before you submit your application. A little planning up front can help you avoid the most common underwriting issues and put you in a stronger position when you’re ready to make an offer.

Improve Your Credit

Underwriters will look at your credit score, payment history, how much of your available credit you’re using, and whether your credit report has any negative marks. If you’re early in the home buying process, focus on improving your credit through healthy utilization and on-time payments. Keep your credit card balances low relative to the limit and avoid opening or closing accounts in the months leading up to your application. It’s also worth requesting your credit report and carefully reviewing it for errors, as even small inaccuracies can bring down your score or raise questions during underwriting.

Pay Down Debt

Your DTI can make or break your chances of being approved for a mortgage. Even with good credit, a high monthly debt load can limit what you qualify for or push your application outside a program’s guidelines.

If you want to strengthen your application file, try to reduce your required monthly payments. If you have an auto loan or student loan, pay more than the minimum requirement, and pay down credit cards to lower both your DTI and credit utilization. If you aren’t sure where to begin, ask your loan officer to run the numbers with you. Sometimes paying down one big balance has a much bigger impact than paying off several small ones.

Be Honest in Your Application

Mortgage underwriting is largely a verification process. Lenders verify everything from your income and employment to your assets and debts using the documents you’ve provided and third-party checks. Anything that’s incomplete or inconsistent has the potential to slow down the process and create approval issues.

Be upfront and honest about all sources of income, any debts you share with someone else, recent credit inquiries, and where the funds for your down payment and closing costs come from. If something requires context, provide it early. Clear explanations and clean documentation can save your application from getting stuck in back-and-forth requests.

Avoid Any Major Changes

Once you decide to apply, aim for stability. Underwriters want to see a steady pattern of consistent income, predictable bank activities, and no new obligations that threaten to increase your DTI. That means holding off on opening new credit cards, buying furniture or appliances, leasing a car, changing jobs, or making large unexplained deposits. Even positive changes, such as switching to a higher-paying role or becoming self-employed, can introduce additional documentation requirements.

If a change is unavoidable, talk to your loan officer first so you know how it’ll affect your chances for approval and what paperwork you’ll need.

Get Pre-Qualified

Again, while pre-qualification doesn’t guarantee mortgage approval, it can surface any potential issues that might cause an underwriter to decline your application earlier on in the process. The sooner you address these issues, the less likely you are to be denied.

It can also put you in a stronger position with sellers, as it demonstrates you’re a serious buyer. In an already competitive market, something as simple as getting pre-qualified can spell the difference between a seller selecting your offer over another buyer’s.

Save up for Your Down Payment

A larger down payment can expedite approval because it lowers your LTV and shows you have financial reserves to draw from. It can also help you qualify for better pricing and reduce (or eliminate) the need for mortgage insurance, depending on the loan type. Even if you’re using a low down payment program, plan beyond the down payment. Closing costs, prepaid items such as homeowners insurance and property taxes, and moving expenses add up quickly. Building a cushion in your savings account can help you get through underwriting with less stress and fewer last-minute surprises.

Apply for the Right Program

Many buyers run into trouble because they apply for a loan type that doesn’t match their financial situation or the property they want to buy. Different programs have different expectations around credit scores, down payments, DTI, MPRs, and more, so it’s important to find the right one for you. And remember: The right program is the one that aligns best with your finances and goals, not necessarily the one with the lowest advertised rate.

Don’t Apply for the Maximum Amount You Qualify for

Just because you qualify for a certain loan amount doesn’t mean that payment will feel comfortable month to month. Underwriting evaluates what you can afford on paper, but your real-life budget includes plenty of things a mortgage application doesn’t capture, such as childcare, travel, rising utility costs, and the general unpredictability of homeownership. Leaving a little breathing room makes your finances more resilient after you move in and can strengthen your chances of approval by keeping your DTI and cash reserves in a healthier place.

Work With a Loan Officer

A good loan officer — such as the ones at Blue Water Mortgage — will help you prepare, not just apply. They’ll help you flag potential issues early, understand what underwriters look for, get pre-qualified, select the right loan program, and generally guide you toward choices that will make the application process smoother.

Buying a home should be exciting, and having the right team behind you makes a real difference. At Blue Water Mortgage, our team of mortgage experts bring more than 150 years of collective experience to help buyers move from pre-qualification to closing with confidence. We focus on clear communication and proactive problem-solving, so you always know what’s coming next and how to stay on track.

What can Blue Water do for you? Contact us today to let us know.

What is underwriting?

Underwriting is the review process lenders use to decide whether to approve your mortgage and on what terms. During this process, an underwriter will look at your finances — including your credit, income, assets, and debts — and the property you’re buying to confirm the loan meets program guidelines and that you’ll be able to repay it.

What does the underwriting process look like?

When you apply for a mortgage, you need to submit various documents, including pay stubs, bank statements, and tax forms. The lender will also order other third-party checks, such as an appraisal, title work, and employment and income verifications. The underwriter reviews all of this, may request additional documents or explanations, and then issues an approval, conditional approval (with terms you need to satisfy), or a denial.

Do lenders verify employment?

Yes. Most lenders verify employment during the loan process, and many do a final verification close to closing to confirm you’re still employed, which is why it’s important to avoid changing jobs between loan origination and closing.

What if my credit score drops during underwriting?

A drop in your credit score can affect your mortgage approval, interest rate, or loan program eligibility, especially if it pushes you below a minimum requirement. Should this happen, contact your loan officer immediately, avoid taking on new debt, and focus on paying down credit card balances and correcting any error on your credit report.

Can you switch lenders during underwriting?

You can switch lenders during underwriting, but it often means starting the process over with a new application and timeline.

What happens if a mortgage is declined?

If your mortgage is declined, the lender will provide a mortgage rejection letter explaining the reason why, and your home purchase will be put on pause as you determine next steps.

• If the cause is as simple as a missing document or a request for clarification, you can go back to the lender with the necessary information.
• If the cause is issues with the property — that it has a low appraisal value or doesn’t meet MPRs — you may need to renegotiate the sale, request home improvements from the seller, or choose a different property entirely.
• If the cause is concerns with your finances, such as a high DTI or poor credit, it’s best to take a step back, work on improving your finances, and potentially look into a different loan program better suited to your situation.

Will I lose my deposit if I’m denied?

Whether you lose your deposit after being denied a home loan depends on your purchase contract and the deadlines in it. Many contracts include a financing contingency that allows you to recover your earnest money if denied, as long as you follow the terms and timelines, so review your contract with your real estate agent or attorney as soon as possible.

Why do mortgages get denied?

Mortgages are often denied due to credit issues, a high DTI ratio, missing or unverifiable documentation, changes in employment or income, undisclosed debts, or issues with the priority, such as a low appraisal or failure to meet MPRs.

Can I be denied after closing disclosure?

Yes, it’s possible to be denied a home loan after closing disclosure. A closing disclosure is an important step, but the lender can still deny your application if something changes or can’t be verified, such as a job loss, a new debt, a major credit change, missing final documents, or a last-minute issue with the property or title.

Can I get a mortgage after being declined?

Yes, you can still get a mortgage after being declined. Many buyers are approved on later attempts once they address the issue that led to the denial. A mortgage rejection letter will give you a clear starting point, and working with a loan officer can help you build a stronger plan before you reapply.