In this article:
You've found your dream home and applied for a mortgage—only to have your dreams dashed when you discover your application has been denied. A mortgage application denial can be crushing, and can happen for various reasons, including a poor credit score, no credit history, too much existing debt or an insufficient down payment.
To understand why your mortgage application may have been denied, you'll want to dive into how the mortgage borrowing process works as well as the role your credit and finances play. Mortgages are very large loans, so lenders tend to have a long list of conditions a borrower is expected to meet before they're approved. Falling short of just one of these requirements can be grounds for denial. Here's what you should know before you submit another loan application.
Reasons Why Your Mortgage Could Get Declined
There are several common reasons a mortgage application could get declined.
- Low credit score: The minimum credit score needed to secure a mortgage varies depending on the lender you choose and the type of mortgage you're seeking. For a conventional mortgage or VA loan, the minimum FICO® Score☉ needed is typically about 620; for a USDA loan, it's usually 640. You can get an FHA loan with a credit score as low as 500, but you will have to make a bigger down payment than if your credit score were higher. (See below for specifics on each type of loan.)
- No credit history: If you don't use credit cards or have never taken out a loan, you may have what's called a "thin" credit file. This means you have a very minimal credit history—or none at all. Without a credit history they can use to assess your creditworthiness, lenders will find it difficult to approve you for a mortgage unless they are willing to find other ways you can prove financial responsibility.
- High debt-to-income (DTI) ratio: To assess your ability to repay the loan, lenders will review the percentage of your monthly income that goes to monthly debts. It may be harder to secure a loan if your housing payment is 28% or more of your gross monthly income (31% or more if you're applying for an FHA loan).
- Small down payment: Putting your own money toward your home purchase shows lenders you have skin in the game, making you more likely to repay the mortgage. The bigger down payment you can make, the better chance you have of being approved for a mortgage.
- Missing application information: Even if you have good credit and a solid income, your mortgage application may be denied if you omit or forget to include necessary information. To avoid disappointment, review your application carefully to make sure it's complete before submitting it.
- Recent job change: Mortgage lenders want to see stability; recent job changes may raise doubts about your ability to hold a steady job. Having the same job for at least two years may help your chances of approval.
How Do You Qualify for a Mortgage?
When assessing your mortgage application to decide if you're creditworthy, mortgage lenders consider several different factors.
- Payment history: A long record of making on-time payments to creditors on your credit report will make you a more appealing borrower in the eyes of a lender.
- Credit utilization ratio: Your credit utilization ratio reflects how much of your available credit you're currently using. A ratio of 30% or higher can harm your credit scores and indicate to lenders that you're not able to fully pay off your existing debt obligations. The lower this ratio is, the better it is for your scores.
- Recent credit applications: If you've recently made multiple applications for loans, credit cards or other types of credit, lenders may see this as a warning sign you're in financial trouble. Applications for credit will result in hard inquiries that stay on your credit report for two years.
- Major derogatories: Bankruptcies, delinquent accounts, accounts in collections, charge-offs, and accounts settled for less than the amount owed are all warning signs you may be a poor credit risk.
- Authorized-user accounts: Being an authorized user on a credit card can help you build your credit file and scores, but a lender isn't likely to view it as an indicator of your own credit management ability. The account may also work against you when the lender calculates your DTI ratio.
- Dispute statements or pending disputes: To get a clear picture of your credit history, lenders typically want to see any disputes on your credit report resolved before they'll approve your mortgage application.
Also keep in mind there are various types of mortgages, designed for different purposes and borrowers; each may have different qualifying requirements. Here's a closer look.
- Conventional mortgage loan: Conventional mortgage loans are not backed by government programs or government agencies. Mortgages originated by banks, credit unions and mortgage lenders fall into this category.
- FHA loans: Intended for first-time homebuyers or those with poor credit, FHA loans are insured by the Federal Housing Administration (FHA). They allow you to buy a home with a down payment of as little as 3.5% of the home's purchase price. In exchange, you'll have to pay private mortgage insurance for the life of the loan.
- VA loans: These loans for current or former U.S. military service members and their spouses are insured by the Department of Veterans Affairs (VA) and let you finance 100% of the home price, so there's no need to save up for a down payment. VA loans can also be used to build a new home, remodel or add onto an existing home.
- USDA loans: Low- to moderate-income rural or suburban homebuyers who meet certain criteria may qualify for these loans. Loans from the U.S. Department of Agriculture (USDA) don't require a down payment and are guaranteed by the government.
- Fixed-rate mortgage: As the name implies, these loans have the same interest rate for the life of the loan, so you don't have to worry about your monthly payments increasing. Fixed-rate mortgages usually have terms of 15, 20 or 30 years.
- Adjustable-rate mortgage: These mortgages have an interest rate that is fixed for an introductory period and then adjusts annually based on current market rates. ARMs usually have lower starting interest rates than fixed-rate mortgages, with the tradeoff that your monthly payments are unpredictable can increase—sometimes substantially—over time.
- Conforming loan: A loan that conforms to limits set by the Federal Housing Finance Agency (FHFA) and meets the criteria of Fannie Mae and Freddie Mac, government-sponsored enterprises that buy and administer most U.S. home loans, is called a conforming loan. The FHFA's 2020 limits for conforming loans are $510,400 or less in 48 states and $765,600 or less for Alaska, Hawaii and certain high-cost counties.
- Non-conforming loan: A mortgage loan for an amount greater than the conforming loan limit is called a jumbo loan. To qualify for a jumbo loan, you'll typically need a better credit score, bigger down payment and more assets than you'd need to qualify for a conforming loan. These loans also have higher closing costs and interest rates.
What to Do If Your Mortgage Application Is Rejected
If your mortgage application is denied, you'll receive a declination letter (also called an adverse action letter) from the lender. By law, you are entitled to a copy of your free credit report if your application is denied. The declination letter should provide instructions for getting a copy of your credit report from the credit reporting agency that was used in making the decision.
Lenders are required to tell you why your application was denied. If the declination letter doesn't specify a reason, contact the lender to ask. Most often, loans are declined because of poor credit, insufficient income or an excessive debt-to-income ratio. Reviewing your credit report will help you identify what the issues were in your case.
Increase Your Chances of Getting a Mortgage
Don't wait until after you receive a declination letter to learn that there's a problem with your credit. Before you apply for a mortgage, get a copy of your free credit report and free credit score to see if there are any issues that might keep you from getting approved.
If there are mistakes on your credit report, have them corrected. If your credit score is too low, take steps to improve your score before you apply for a mortgage. Paying down debt, demonstrating good credit habits and reducing your credit utilization can boost your odds of getting a mortgage—and of successfully paying it off.