Top Reasons Mortgages Get Denied (and What to Do)

ometimes the first time a homebuyer applies for a mortgage, they get denied. While this might mean a homebuyer is not ready yet to purchase a home, there are often workarounds and solutions. In fact, the issue is not always the homebuyer. It might be that they went to a big bank that did not take the time to fully understand their situation and work with them.

Let’s review some of the most common reasons mortgage applications get denied. For each one, we’ll explain what you may be able to do about it.

1. Debt-to-Income Ratio Is Too High

If your debt-to-income (DTI) ratio is too high, that may mean your debts are too high, your income is too low, or both.

Here are some things to consider if this happens:

• Can you pay off any of your existing debts? If so, see whether doing so improves your DTI ratio.
• Make sure all of your eligible income is being factored into the calculation.
• Ask about loan programs and terms that can lower your monthly payment.

If you have self-employment income, it is especially important to work with a mortgage company that has experience with these scenarios. Underwriters at big banks may not always understand nontraditional income and could have difficulty qualifying applicants whose income is not reported on a W-2.

A mortgage company that offers bank statement loans may provide an alternative way to document and verify your income. By working with a lender that has an established process for these loans, you may be able to qualify without being penalized simply because you earn income outside of traditional employment.

Once all of your eligible income is properly accounted for, it may be enough to get your DTI ratio where it needs to be.

2. Credit Score

Ideally, your credit score when you apply for a home loan will be 740 or above. You may still be able to get a mortgage with a lower score, but the lower your score is, the harder it may be to qualify for competitive rates. If your score is too low, your application could be denied.

The smart thing to do is check your credit score and credit reports before applying for a mortgage. You can get free weekly credit reports from each of the three credit bureaus at AnnualCreditReport.com.

What can you do if there are issues with your credit score or reports?

• Errors on credit reports do happen, so it’s worth reviewing yours carefully and disputing anything that’s inaccurate.
• Look into mortgage products with more flexible credit score requirements. FHA and VA loans are two possible examples.
• Work on improving your credit score by reducing your credit utilization, paying down debts, and making payments on time.

3. Employment Status or History

Lenders typically look at whether you have been employed consistently over the past two years. If it does not appear that you have a stable career or reliable income, you could be denied a mortgage.

If there is anything unusual about your recent employment history, but you are stable in your career, have a written explanation ready. Even starting a new job within the past two years could cause a lender to ask questions, particularly if the change involved a significant career shift.

However, if you can show that you are following a stable and logical career path, you may be able to overcome this hurdle.

4. Issues With the Property’s Market Value

Sometimes a mortgage application may run into problems because of the appraised market value of the property you want to buy.

If the appraisal comes in below the purchase price, you may be able to renegotiate the price with the seller, cover the difference with additional cash, request a reconsideration of value, or look at a different property.

Buy a Home in Missouri and Many Other States

Now you know some of the common reasons people get denied when applying for mortgages, along with some possible solutions.

Whether you are shopping for a home in Missouri or one of the many other states we serve, McGowan Mortgages works to make the process quick and easy. We take the time to understand your situation, explore potential solutions, and help you overcome obstacles on your path to homeownership.

To get started, please give us a call at (816) 631-9687 to schedule your consultation.