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No homebuyer wants to hear the words, “Your mortgage loan was denied in underwriting.” Fortunately, it’s unlikely you’ll get this news if your loan was properly preapproved before you found a home. If your home loan application is denied, there are steps you can take to salvage your homebuying chances and fix the issues to flip the underwriting denial to an approval. Common reasons loans are denied in underwritingThese were the top six reasons for mortgage denials in 2020, according to a report by the National Community Reinvestment Coalition (NCRC):
How undisclosed debt on a mortgage application can cause loan denialMortgage lenders have a number of quality control reports they run to check for undisclosed debt on a mortgage application. If they find additional debt at any point in the mortgage process, your approval could turn into a loan denial — or worse, a fraud investigation. Some examples of undisclosed debt include: Private mortgages on real estate. If you bought a home from a relative or financed a rental property from a private investor, the loan balance and monthly payment should be disclosed. Lenders check public records nationwide to see if there is any other property titled in your name. Recent credit applications. Let your lender know if you recently opened a new credit account, even if it doesn’t show up on your credit report. Lenders continue to “refresh” your credit report up to the date of closing, and new debt could result in delays or denial. Alimony or child support. Even though these debts often don’t appear on your credit report, underwriters check your bank statements and paychecks for signs of regular debt payments like alimony or child support. Payment arrangements for past-due taxes or judgments. If you’re on a payment plan for past-due IRS taxes or payments related to a judgment, provide all documentation upfront. 6 steps to take if your mortgage is denied in underwritingIf your loan is denied, take the following six steps before you give up on your home purchase:
How often does an underwriter deny a loan?According to recent data collected about mortgage lending activities by the Home Mortgage Disclosure Act (HMDA), loan denials are more common on home equity loans, home improvement loans and refinance applications. Home purchases have the lowest denial rates. The table below shows the home purchase, home equity and home improvement loan and cash-out refinance denial rate by race, according to 2020 HMDA data compiled by the NCRC. How to avoid a mortgage loan denialThere are some measures you can take to reduce your chances of a mortgage denial in underwriting. REPAIR YOUR CREDIT BEFORE YOU APPLY. Whether it’s paying off maxed-out credit cards or refinancing out of a cosigned car loan, taking these steps before you fill out a loan application may help boost your score and save you the heartache of a mortgage rejection. FILL OUT A COMPLETE AND ACCURATE LOAN APPLICATION. Whether it’s a prior address or the exact start and end dates of prior employers, taking the extra time to give the lender the most accurate information may reduce the chances of getting denied after preapproval. DON’T SWITCH JOBS OR CHANGE HOW YOU’RE PAID. A salaried, full-time job for two years gives you the highest odds of approval when it comes to income. Lenders verify your employment up to and including the day of your closing, and a job change before closing could delay your closing or flip an approval to a denial. GET A FULL CREDIT APPROVAL BEFORE YOUR HOUSEHUNT. Many lenders offer full credit approvals that allow you to have your income, credit and assets fully vetted by an underwriter before you find a home. HAVE YOUR DOWN PAYMENT IN THE BANK FOR AT LEAST TWO MONTHS BEFORE APPLYING. Most lenders require two months’ worth of bank statements to prove you have the funds for a down payment. If you have a cash stash, deposit it a few months ahead of your loan application. GET RID OF AS MUCH DEBT AS POSSIBLE. The less debt you have, the more mortgage borrowing power you’ll accrue. Avoid credit use once you’re preapproved — lenders always reverify your credit before closing. APPLY FOR THE RIGHT LOAN PROGRAM. Take time to read up on the minimum mortgage requirements ahead of time so don’t apply for a loan program you have low odds of being approved for. If one lender doesn’t offer the program that’s the best fit, keep searching until you find one that does. In general, loans backed by government agencies such as the FHA, the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) are easier to qualify for than conventional loans. WORK WITH AN EXPERIENCED LOAN OFFICER. Loan officers with decades of experience often know how to present a difficult credit or income history to an underwriter to maximize your odds of success. DON’T APPLY FOR THE MAXIMUM MORTGAGE LOAN AMOUNT YOU QUALIFY FOR. When you get preapproved for a home loan, lenders usually estimate your property taxes, insurance and HOA fees. If you don’t leave enough wiggle room in your DTI ratio for a higher-than-expected property tax bill or pricey HOA dues on the home you ultimately choose, it could lead to an underwriter thumbs down. |