One you complete and send the application, you’re now at the mercy of loan underwriters, who are responsible for digging into all the details of your financial life and the home property. These underwriters will typically never know you or see you in-person but make most of their judgement based on the paperwork you submit.
If mortgage underwriting uncovers any red flags, your application could be rejected. So learn what underwriters look for and how you can avoid triggering a rejection.
What Does an Underwriter Do?
A mortgage loan underwriter is the person in charge of making the final call on your mortgage approval. They evaluate all of the documentation associated with your application and help the lender determine if you’re qualified for a loan. That includes pulling your credit reports, ordering a home appraisal, verifying your income, employment and assets and double-checking the source of your down payment funds.
If there are any questions or additional information needed, the underwriter will work with you and your lender to collect everything to make a final decision.
How Long Does Underwriting Take?
Loan underwriting is usually the lengthiest part of the mortgage process. Generally, it takes about 30-45 days from the start of underwriting to the closing of the loan. However, that timeline can be impacted by a number of factors, including the complexity of your financial situation, whether more documentation is needed and how many loan applications are currently on the lender’s plate.
Other key factors tied to the home sale, like whether the appraisal comes in too low, repairs are required before completing the sale or the sellers need more time before moving to a new home, can also delay the mortgage processing.
How Often Does an Underwriter Deny a Loan?
If you’ve been denied a mortgage in the past, don’t feel too bad. It happens fairly often. As of 2019, about 8% of applications for site-built, single-family homes were rejected. Keep in mind that post-pandemic, that number may be even higher since many lenders have tightened their qualification standards.
Whether you’ve been denied in the past or hope to avoid that situation when you eventually apply, the key is understanding why an underwriter could reject a mortgage loan application, and avoiding those issues when you apply.
Reasons for Getting Rejected By an Underwriter
Here’s a closer look at the most common reasons why a loan underwriter will reject a mortgage application.
One of the biggest factors that a mortgage underwriter will evaluate is your credit history and score. Your creditworthiness determines how big of a risk you pose to potential lenders. A good credit score means you’re likely to repay your loan on time, while a few dings mean you could end up missing payments or even defaulting.
That means your credit score will play a big factor in whether or not you’re approved for a mortgage. While it is possible to qualify for some government-backed mortgage loans with a credit score as low as 500, most conventional lenders require a score of at least 620. However, a score of 740 or higher is preferred and will help you get the lowest interest rate available.
Even if your credit score is in decent shape, certain negative events in your credit history could give an underwriter pause. For example, if you had an account in collections or filed bankruptcy in the past, the underwriter might not approve the loan.
Also, keep in mind that even if your credit was good when you applied for your mortgage, any hits to your score that occur while you’re undergoing underwriting could result in a denial. So be sure to keep up with all your payments and don’t make any sudden moves, such as applying for a car loan or new credit card, or closing a credit card until the mortgage is approved.
High Debt-to-income Ratio
Another important factor that mortgage underwriters consider is your debt-to-income (DTI) ratio . This is a measure of how much of your monthly gross income goes toward paying off debt, expressed as a percentage.
For example, say you earn $5,000 per month before taxes are taken out. You have a credit card payment of $150, a car loan payment of $300 and a student loan payment of $550 due each month. That would give you a DTI of 20% (total monthly debt of $1,000 divided by gross monthly income of $5,000).
Most lenders require your DTI to be below 43% when they include all your debt obligations, plus the mortgage amount, against your monthly gross income. If your debt exceeds that, they will likely not approve you for a mortgage.
Shaky Job History
Lenders want to know that you have a stable income to support your mortgage payments, so underwriters will dig into your employment history and ensure you have reliable employment for several months or up to two years, depending on whether you are a salaried employee or self-employed.
Some situations that can cause your mortgage application to be rejected include getting laid off or recent job changes, especially if you switch to a different field. If you did change jobs recently, it can help to include a letter from your employer verifying your position and salary.
Your income sources also matter. If a good chunk of your earnings come from commissions, bonuses or other sources outside of a regular salary, it could signal to the underwriter that your income is unstable and they might require a longer period of proof of income. That could also lead to your mortgage application being denied.
No Paper Trail
When it comes to your income, assets and down payment funds, underwriters expect to see detailed records of where the money came from. For example, you’ll need to provide W-2s from the last two to three years and pay stubs from at least the past 30 days that prove you’re employed and verify what you declared on your application.
You will also need statements that show your bank account and investment balances. If you were gifted some or all of the money for your down payment, you’ll need a gift letter that explains where the funds came from and confirms it was indeed a gift, not a loan (which isn’t allowed).
Aside from your personal financial situation, underwriters will also closely examine the condition and value of the property you’re buying. One important number is the home’s appraised market value. Lenders don’t want you to borrow more than a home is worth; if you have to sell the property at some point, it’s important to get enough to pay off the mortgage.
It may be okay if the appraisal comes in slightly lower than expected. But if the appraised value is far below what you plan to pay for the property, there’s a good chance your mortgage application will be rejected, or you will have to pay the difference out-of-pocket.
Problems With the Property
If you’re looking to buy a fixer-upper, keep in mind that some lenders require property to meet certain standards in order to secure financing. Some loans, such as Federal Housing Administration (FHA) loans, come with a set of specific property standards for safety, security and soundness that must be met to qualify. So if the inspection report for the home you have your eye on comes back with roofing or electrical issues, for instance, you may be denied a mortgage.
Next Steps After a Rejection
If you’ve recently gone through the mortgage application process and were denied a loan, it’s important to find out why. Your lender is legally required to explain the reason for rejecting your loan application, which will be detailed in a letter of disclosure. If you don’t understand the reasoning in the letter, contact your lender for a more thorough explanation.
Once you understand the reason(s) why your application was rejected, you can work on fixing the issue. Some steps you can take to remedy common issues include:
- Improve your credit. If you were denied a mortgage because of a low credit score or negative marks on your credit reports, it’s important to clean up your credit before applying again. Start by checking your credit score and pulling a free copy of each credit report at AnnualCreditReport.com. Review them for mistakes that could be dragging down your score and dispute any errors you find.
- Pay off some debt. Spend the next several months paying all of your bills on time (payment history makes up 35% of your score) and paying down any revolving debt. Once your credit score is back in the “good” range, you should have an easier time getting approved.
- Lower your DTI. Lowering your outstanding debt balances will not only improve your credit score, but will also lower your DTI. Ideally, your monthly DTI should be below 36%, and no more than 43% when including the mortgage balance. So if you have credit cards or loans that are eating up too much of your income, work on getting rid of those debts before taking on a mortgage.
- Increase savings. If you were denied a mortgage because your down payment wasn’t high enough or you didn’t have enough assets to back up the loan, it’s important to beef up your savings. Having more cash in the bank will make you a less risky borrower in the underwriter’s eyes. Plus, you might qualify for a larger loan and/or lower rate.
- Choose a different property. If there are issues with the house you intend to buy, such as an inflated selling price or costly damage to repair, it might be time to set your sights on a different one. It might be hard to let go if you found a property you really liked, but you will probably end up better off financially by choosing a home that’s easier to finance.