How Often Does an Underwriter Deny a Loan?

23 hours ago 5

Applying for a mortgage is one of the biggest financial steps you’ll ever take – and while many applications are approved, not every loan makes it through underwriting. Naturally, that raises the question: How often does an underwriter deny a loan?

On average, about 1 in 10 mortgage applications are denied. That means the majority are approved, but there are still a number of reasons why an underwriter might say no. 

Understanding how underwriting works, why denials happen, and what you can do to avoid them will put you in a stronger position when you apply for a mortgage.

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What is underwriting?

Mortgage underwriting is a key step in the homebuying process where your lender evaluates your financial health to determine your ability to repay the loan.

They typically review:

  • Credit: Your borrowing and repayment history, current debts, and credit score. Conventional loans usually require a score of 620 or higher, though other loan types may have different requirements.
  • Income: Documentation of your earnings, such as W-2s, pay stubs, and bank statements. Self-employed borrowers may need to provide tax returns or other proof of income.
  • Assets: This refers to the type of funds you have access to. This includes investments, retirement funds, cash in savings and checking accounts, and more.

Your lender will order an appraisal to confirm the home is worth the sale price. A licensed appraiser reviews the property’s condition, upgrades, and recent comparable sales to determine its fair market value.

So, how often does an underwriter deny a loan?

In 2023, about 9.4% of all home purchase applications were denied, according to data from the Consumer Financial Protection Bureau. That means just under 1 in 10 mortgage applications didn’t make it past underwriting.

Denial rates vary by loan type, though. FHA loans had a higher denial rate at 13.6%, while conventional conforming loans had the lowest at 7.9%, showing some variation depending on the program you choose. Refinance applications tend to have higher denials, with an overall rate of 32.7% in 2023.

So while most buyers are approved, underwriters consider factors like loan type, credit score, debt-to-income ratio, and down payment size. 

6 reasons your mortgage loan may be denied in underwriting

Why would an underwriter deny a loan? A prospective homebuyer’s loan might be denied during the underwriting process for various reasons, including:

1. Low credit score

Your credit score is one of the most important factors in mortgage underwriting. It reflects your history of borrowing and repaying money, including credit cards, student loans, auto loans, and previous mortgages. Scores range from 300 to 850, with higher scores indicating lower risk.

Recent changes in credit behavior can also affect approval. For instance, suddenly maxing out a credit card or applying for multiple loans may raise red flags during underwriting.

2. High debt-to-income ratio

A high debt-to-income ratio (DTI) can reduce your chances of mortgage approval. Each loan program sets its own DTI limits. To calculate it, divide your total monthly debt payments by your monthly income and multiply by 100. A higher percentage means more of your income goes toward debt, which can make lenders hesitant.

3. Financial issues

Underwriters may deny a mortgage if they identify financial concerns beyond credit score or debt-to-income ratio. This can include unusual or unexplained bank account activity, such as large withdrawals or deposits that aren’t documented, which may raise questions about your financial stability.

Past payment history also plays a critical role. Repeated missed mortgage payments, late rent, or other delinquencies can signal risk to lenders. Additionally, outstanding collections, liens, or recent bankruptcies can further jeopardize approval. Essentially, any financial behavior that suggests you may struggle to make consistent mortgage payments can lead an underwriter to deny your application.

4. Employment change

Lenders want to see steady income when approving a mortgage. Frequent job changes or gaps in employment can raise concerns about your ability to make consistent monthly payments. Most lenders require proof of at least two years of employment history to demonstrate financial stability.

5. Low appraisal

A low appraisal can affect a loan approval and cause it to be denied during the underwriting process because a lender cannot lend more to a borrower than the loan program allows. For example, the appraisal comes back a lot lower than the sales price of the home, the buyer would have to pay the difference or renegotiate to a lower price.

6. Problems with a property

Issues with the property can increase the likelihood of a loan being denied. Major problems uncovered during a home inspection, such as foundation damage or structural concerns, can raise red flags for lenders. Getting an inspection early can help identify potential issues before they affect your mortgage approval.

Should you be worried about underwriting?

If you’re wondering if you should be worried about underwriting, the short answer is no, as long as you meet the requirements for your loan type.

Let’s look at different types of home loans and their basic qualifications:

  • Conventional loans: Conventional loans generally require a minimum credit score of 620 and a debt-to-income ratio no larger than 50%. They’ll also consider your financial and physical assets to get a conventional loan.
  • Jumbo loans: Designed for homes above conforming loan limits ($806,500 in 2025, or $1,209,750 in Alaska and Hawaii). Lenders typically require at least a 680 credit score and a down payment of up to 20%.

On the other hand, government-insured loans have different minimum requirements:

  • FHA loans: Backed by the Federal Housing Administration, these allow approval with credit scores as low as 500. With a 580+ score, you can qualify for a 3.5% down payment.
  • USDA loans: Backed by the U.S. Department of Agriculture, these are limited to designated rural areas. You’ll need a 640+ credit score with most lenders and income under 115% of the area median.
  • VA loans: Available to service members, veterans, and surviving spouses through the Department of Veterans Affairs. Many lenders accept scores as low as 580, allow higher DTI ratios, and require no down payment.

What to do if an underwriter denies your loan

Getting denied in underwriting doesn’t mean homeownership is out of reach. It just means you may need to make some adjustments. Here are a few steps to take:

  • Improve your credit score: Check your credit report for errors, pay down existing debt, and reduce high balances to show stronger financial health.
  • Increase down payment: Putting more money down lowers your loan-to-value ratio, reduces monthly payments, and makes you a safer bet for lenders.
  • Consider a co-signer: A co-signer with stronger credit can help you qualify, but both parties share responsibility if payments are missed.
  • Reevaluate your home search: Consider a less expensive property that better fits your finances, and work with a real estate agent to guide your search.

FAQs

Can you get approved after being denied in underwriting?

Yes – if you address the issues that led to the denial, such as improving credit or reducing debt, you may qualify with the same or a different lender.

Does a loan denial hurt your credit score?

The denial itself doesn’t affect your credit score, but the hard inquiry from applying for the loan may cause a small, temporary dip.

How long should you wait after being denied to apply again?

You can apply again right away, but it’s often best to take a few months to improve your financial profile first.

What are the chances of getting denied after pre-approval?

Even after pre-approval, there’s still a chance your loan could be denied in underwriting. Pre-approval is based on preliminary information, but underwriting reviews your credit, income, assets, debts, and the property itself. Changes like new debt, missed payments, job changes, or a low appraisal can affect approval. While most pre-approved buyers move forward successfully, roughly 1 in 10 applications are denied during underwriting, so it’s important to keep your finances stable until closing.

How often are FHA loans denied in underwriting?

FHA loans tend to have higher denial rates than conventional loans. In 2023, about 13.6% of FHA home purchase applications were denied during underwriting. Denials can result from low credit scores, high debt-to-income ratios, or other financial issues, so maintaining stable finances and meeting program requirements can improve your chances of approval.

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