Recent statistics indicate that about 16% of all mortgage applications filed in 2020 got denied. One reason why that number is so high is because more people applied for mortgages in 2020. It’s important to note, though, that the Consumer Finance Protection Bureau doesn’t have a standard way of collecting denial rates, and preapproval denials aren’t even included in the figure above!
If you were recently denied, then you likely want to know why your mortgage can be rejected by an underwriter and whether you should attempt to apply again. Learn more about the top 7 reasons a mortgage might get denied below.
1. Your DTI Ratio is Too High
The number one reason why your mortgage application might get denied is because of a high debt-to-income ratio. Mortgage lenders use a borrower’s DTI ratio to estimate the person’s ability to pay off their past debts and new potential mortgage. If your DTI ratio is higher than 50%, then you’re likely going to receive a rejection. Lenders will assume you have too much debt to pay off, which could cause you to fall short on mortgage payments.
The only way to fix this is to reduce your debt load or increase your average income.
2. Your Credit Score is Too Low
Another common reason why an underwriter will reject your mortgage application is because your credit score is too low. A low credit score makes you appear too risky to underwriters because they’ll assume that you don’t have a great handle on your finances.
3. There’s an Error on Your Application or It’s Incomplete
If you didn’t fill out your application correctly or in full, then it will likely get rejected right away.
4. Your Income Verification Isn’t Accepted
Income verification is a major factor of approving mortgages, so any non-traditional income sources might lead you to getting denied a mortgage. If that’s the case, then know that you have other options, like seeking out a non-QM home loan instead.
5. Your Loan-to-Value Ratio is Too High
You won’t get approved for a mortgage if the loan-to-value ratio is too high. This ratio can get brought down through a higher down payment, so if you can afford to increase your down payment, then you can reduce your loan-to-value ratio.
6. Closing Costs and Down Payments Funds Aren’t Secured Ahead of Time
Underwriters also want to see proof that you’ll be able to handle your home’s closing costs and down payments. If these costs aren’t secured, then you’ll likely face a rejection.
7. You’ve Missed Mortgage Payments in the Past
Are you a previous homeowner who missed mortgage payments? If a mortgage underwriter sees proof that you’ve failed to uphold your payment obligations in the past in the form of a foreclosure or short sale, then they’re likely to deny your mortgage application entirely. Underwriters may see you as too risky of a borrower.
Do You Want to Speak With an Expert About Your Mortgage Needs?
If you’ve already had your mortgage rejected for one or more of the reasons above, then it makes sense to feel frustrated. Here at Non-QM Home Loans, we understand how unique every person’s situation is, and we pride ourselves on helping interested buyers secure non-traditional mortgages.
Contact us now at (800) 413-0240 to learn more about how we can help you with all your mortgage needs going forward.
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