6 Reasons Your Mortgage Loan May Be Denied In Underwriting
Why would an underwriter deny a loan? A prospective home buyer's loan might be denied during the underwriting process for various reasons, including the following.
1. Low Credit Score
A low credit score can keep a home loan from being approved in underwriting. A credit score, which ranges between 300 – 850 (850 being the highest possible score) is made up of many factors including but not limited to: Your payment history (how well you've made your payments in the past), the amount of debt you owe, credit utilization (the amount of available credit you have compared to the amount you use), the amount of time you've used credit, types of credit (such as student loans, auto loans, credit cards, mortgages, etc.) and inquiries (when other companies make inquiries into your credit).
Recent credit behavior may also play a role in a decision to deny you. For example, if a borrower suddenly charges a credit card a number of times or applies for numerous other types of loans, they may be denied a mortgage loan in underwriting.
2. High Debt-To-Income Ratio
A high debt-to-income ratio (DTI) can affect a loan and potentially lead to a home loan being denied. Each loan program has a maximum DTI ratio that may vary lender to lender. You can calculate your DTI by totaling your minimum recurring monthly debt payments, adding up your total monthly income, dividing your debt by your income and multiplying the result by 100.
3. Problems With A Property
Issues with a property can make a loan more likely to be denied during underwriting. A home inspection could reveal major issues like foundation problems, so consider getting an inspection on the home early on to help you avoid any unwanted surprises.
4. Employment Change
It's important to showcase evidence of a steady income when applying for a mortgage. Mortgage lenders like to see whether a potential borrower is financially stable enough to afford monthly mortgage payments. If you like to job hop or otherwise can't prove that you have a steady income, a lender may worry that you can't make your mortgage payments reliably. Many mortgage lenders require you to show 2 years of employment history.
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. Financial Issues
An underwriter might deny a mortgage loan if you present other financial issues, such as unusual bank account activity or missed mortgage payments in the past. For example, if a potential applicant recently spent all their money out of their bank account or if the lender finds that they have had recurrent missed mortgage payments, they may not get approved for a loan in the underwriting stage.
