What Can Go Wrong in Underwriting?

What To Do if Your Mortgage Falls Through

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If your offer on a home has been accepted, you might be on edge about going through the next step in the buying process: underwriting. After all, many loans are denied because they don’t meet the lender’s standards.

While the underwriting process can be daunting, you can take steps to help increase the likelihood of your loan getting approved. First, let’s learn in more detail about what could go wrong with your loan application. 

Key Takeaways

  • Underwriting is the process that financial institutions use to approve a borrower for a mortgage. 
  • Underwriters look in depth at the home you're buying and your personal financial situation.
  • To help improve your chances of getting a loan, don't take out any new credit, change jobs, or miss any bill payments during the underwriting process.
  • About 9% of mortgage applications to buy a home in the U.S. were denied in 2020, according to the Consumer Financial Protection Bureau.

What Happens in Underwriting?

Underwriting is the process of determining whether a borrower qualifies for a mortgage based on their creditworthiness. Your lender will look in detail at your personal finances (along with any co-borrowers like a spouse), and the home that you're buying. 

The majority of mortgage applications are approved, but many are not. About 9% of mortgage applications were denied in 2020, according to the Consumer Financial Protection Bureau.

You can get preapproved for a mortgage by having your lender review some basics about your personal financial situation in advance. If you're preapproved you're likely to be approved for a loan, although a preapproval does not guarantee your loan will be approved.

Why Mortgage Loans Get Denied in Underwriting

Once your offer is accepted by the sellers, you must still go through the underwriting process before the home can become yours. An underwriter can find you not creditworthy enough to purchase that particular property for a number of reasons.

Here are some of the most common reasons why your loan could be denied:

Your Credit Report Has Issues

Your credit report is a detailed history of your credit accounts, including how much debt you have and how timely you’ve made payments. Your lender will check your credit report when you get preapproved for a loan.

If your credit report has changed since then, your loan could be denied if the changes don’t meet the lender’s underwriting standards. Your credit report could be negatively impacted if, for example, you miss a payment or took out a new loan such as an auto loan or credit card.

To help avoid negative changes to your credit report, you can use autopay services to ensure you make your payments on time. Also, avoid applying for any new loans or credit during the underwriting process.

You Recently Changed Jobs

Changing jobs could potentially jeopardize your loan approval. Your lender could interpret a recent job change as a sign that your employment and income are less stable. This is especially true if you lose or quit your job to pursue self-employment because it's more difficult for a self-employed person to prove they have reliable income.

People who work for themselves typically need to show tax returns from two years' worth of income. So if you start your own business during the underwriting process, you're essentially resetting the clock on your wage history toward your home purchase. If you have the option, it's best to wait until after the mortgage is approved and you have closed on the home before you make any changes to your employment.

You Have Too Much Debt

As part of the underwriting process, lenders will look at your debt-to-income ratio, or DTI. This ratio reflects how much of your income goes towards debt each month. It’s calculated by dividing your total monthly debt payments by your income. 

Even if you were preapproved, your mortgage application could be denied if you took out new debt or if your income dropped, both of which can affect your DTI. If you have a spouse or partner who is applying for the loan with you, their DTI will also play a role in whether the loan is approved. 

If your debt-to-income ratio is a problem, you can either pay off some of your debt, try to raise your income, or change who will be listed on the mortgage to get your DTI below the thresholds for mortgage approval.

Your Down Payment Is Too Small

Lenders generally require a down payment to lower their risk. A down payment improves the loan-to-value, or LTV, ratio, which measures the amount of your mortgage to the home’s appraised value. Each type of mortgage has its own requirements for LTV ratios. For example, first-time homebuyers can get a Federal Housing Loan (FHA) loan with an LTV ratio of up to 96.5%, which means you'll need to put at least 3.5% down.

Your mortgage application could be denied if it does not meet the LTV requirements. To avoid this problem, you can save up more money for a down payment or find another source to help increase your down payment, such as a gift from a family member. Or, you could look for a less-expensive home to buy. 

You could explore loans designed for first-time homebuyers that may have lower LTV requirements and require smaller down payments. 

The Property Has Problems

While you might be willing to pay more for a house than it's worth, a bank will generally only lend you up to its appraised value to reduce risk. That way, in the event you default on your loan, the bank can minimize its losses with a foreclosure.

If the appraisal comes in below what you offered because the appraiser uncovered problems, then you have a few options:

  • Get a new appraisal.
  • Walk away from the home.
  • Make up the difference with cash savings.
  • See if the seller is willing to lower the sales price.

In addition, some types of loans require the property to meet certain standards. You may not be able to get a VA loan, for example, if the property has termites. In order to get an FHA loan, the property will have to meet certain standards for living conditions. If the property doesn't meet these standards, you'll need to see if the seller can fix them so the loan can proceed. 

What To Do if Your Loan Is Denied

The Equal Credit Opportunity Act protects you from being denied credit because of factors like your race, sex, marital status, and more. If you think you were improperly denied a loan, you can bring this issue up with your lender. 

If that doesn't resolve the situation, you can contact your state's attorney general office, sue the lender in court, and/or file a complaint with the Consumer Financial Protection Bureau.

However, if you’re loan was denied because it did not pass the lending standards after the underwriting process, then you take other steps depending on the reason. For example, you may have to work on your credit score by reducing debt if your credit report was an issue. Or, you may consider saving for a larger down payment if your loan-to-value ratio was a problem.  

The Bottom Line

Being denied a mortgage can be frustrating. Getting a preapproval can help ease some of the frustration by giving you an early sense of whether you may be qualified for a particular loan. 

You can also try to minimize problems with your loan approval by, for example, not missing any payments, not changing jobs, and not taking out any new credit during the underwriting process. In many cases, you can address the issues that arise so that you can still buy the home. 

Frequently Asked Questions (FAQs)

When does a mortgage go to underwriting?

Your mortgage will go to underwriting after you've had an offer accepted on a home and submitted a full mortgage application. At that time, your lender will look at the details of your financial situation and evaluate the house you'll be buying to assess their risk. 

How long does underwriting take?

The underwriting process is variable. If you've got a relatively uncomplicated loan and a straightforward financial situation, underwriting could take as little as a few days. But if you have a more complex financial situation or a more complicated type of loan, such as a VA loan that requires a special appraisal, it could take a few weeks.

How many mortgage preapprovals get denied in underwriting?

About 9% of all mortgages were denied during the underwriting phase in 2020, according to the Consumer Financial Protection Bureau. The denial rate varies by loan type. For example, in 2020, around 14.1% of FHA loans were denied during underwriting, while just 7.6% of conventional loans were denied.

Article Sources

  1. Consumer Financial Protection Bureau. “Data Point: 2020 Mortgage Market Activity and Trends.”

  2. Consumer Financial Protection Bureau. “Get a Prequalification or Preapproval Letter.”

  3. PenFed Credit Union. “Basics of Self-Employed Mortgage Loans.”

  4. National Foundation for Credit Counseling. “5 Surprising Things That Might Stop You From Getting a Home Loan.”

  5. U.S. Department of Housing and Urban Development. “Loans.”