The Top 5 Reasons Your Mortgage Application Could Be Denied

Applying for a mortgage can be an exciting yet nerve-wracking process, especially when you’re eager to secure your dream home. But sometimes, despite your best efforts, your mortgage application might not go as planned. Mortgage denials can happen for a variety of reasons, many of which can be avoided with proper planning.

In this article, we’re breaking down the top five reasons mortgage applications get denied so you can avoid these common pitfalls and increase your chances of approval.

1. Low Credit Score

Your credit score plays a major role in determining whether you qualify for a mortgage. Lenders rely on your credit score to assess how well you’ve managed credit in the past and your likelihood of repaying the loan. A low score can signal risk to lenders, and if your score falls below the required threshold, your application could be denied.

How to Avoid It:

• Check Your Credit Early: Before applying for a mortgage, check your credit report and score. You can request a free report from the major credit bureaus. If your score is lower than you’d like, work on improving it by paying down debt and ensuring there are no errors on your credit report.
• Aim for a Higher Score: While the exact minimum score varies by loan type, aiming for a score of 620 or higher is ideal for most conventional loans. The higher your score, the better your interest rate and loan terms will be.

2. High Debt-to-Income (DTI) Ratio

Your debt-to-income ratio is the percentage of your monthly income that goes toward paying your debts. Lenders use this ratio to determine how much of your income is already committed to existing obligations. A high DTI suggests you might have trouble taking on additional debt, and as a result, lenders may view you as a higher-risk borrower.

How to Avoid It:

• Pay Down Existing Debt: Before applying for a mortgage, try to reduce your debt as much as possible, especially high-interest debt like credit cards. This can help lower your DTI and improve your chances of approval.
• Don’t Take On New Debt: Avoid making large purchases on credit or taking on new loans during the mortgage application process, as this can increase your DTI and hurt your approval chances.

3. Insufficient Income or Employment History

Lenders want to ensure you have a stable source of income to repay your mortgage. If you’ve recently changed jobs or have a spotty employment history, lenders may view this as a risk factor. Additionally, if your income doesn’t meet the loan requirements, your application could be denied.

How to Avoid It:

• Show Stability: Lenders typically look for at least two years of consistent employment in the same field or with the same employer. If you’ve recently switched jobs, make sure you have a solid explanation and provide evidence of continued income.
• Provide Proof of Income: Be prepared to submit pay stubs, tax returns, or other documents that verify your income. If you’re self-employed, lenders will often require a minimum of two years of tax returns to assess your financial stability.

4. Problems with the Property Appraisal

When you apply for a mortgage, the lender will typically order a property appraisal to ensure the home’s value meets the loan amount. If the appraisal comes in lower than the agreed-upon price, this can cause issues, especially if the home’s value doesn’t support the loan.

How to Avoid It:

• Understand the Market: Before making an offer on a home, make sure it aligns with the current market value. If you’re buying in a competitive market, work with your real estate agent to avoid overpaying for a home.
• Consider a Larger Down Payment: If the appraisal value is lower than the sale price, you may need to make up the difference with a larger down payment to satisfy the lender.

5. Unexplained Deposits or Irregularities in Your Bank Accounts

Lenders will often review your bank statements as part of the mortgage application process. Large, unexplained deposits or inconsistencies in your accounts can raise red flags. If the lender can’t trace the source of a deposit or if there are sudden fluctuations in your bank balance, it could be seen as a risk.

How to Avoid It:

• Document Large Deposits: If you receive a large deposit—such as a gift, bonus, or sale of property—be sure to provide proper documentation to explain the source. This helps the lender verify that the funds are legitimate and not a loan.
• Avoid Last-Minute Transfers: Try to keep your accounts as stable as possible during the mortgage process. Avoid transferring large sums of money or making other financial changes that could cause confusion.

Final Thoughts

Getting denied for a mortgage can feel like a setback, but with the right preparation, you can avoid common mistakes and increase your chances of success. Whether it’s improving your credit score, reducing your debt, or ensuring your paperwork is in order, being proactive will make a big difference in your homebuying journey.

If you’re considering applying for a mortgage, reach out to us at RCG Mortgage. We will help you navigate the process and ensure your application stands the best chance of approval. Let’s get you into your dream home!