How to Handle Mortgage Application Rejection

Applying for a mortgage is both exciting and completely terrifying. You’re required to fill out volumes of paperwork and gather all kinds of personal documents, like pay stubs, tax returns, and credit reports. Once the application is submitted, you may hear back with the final approval answer in a few days or more.

According to a Federal Reserve study, 1 of every eight home loan applications (12.1 percent) ends in a rejection. When this happens, your lender will explain the reasons why, and you will receive, within 30 days, a written explanation from the mortgage company that outlines the official reason(s) why.

You may want to just curl up in a ball, but don’t. It’s important to get the facts. First, you need to ensure that you weren’t turned down based on incorrect information or errors. Review the reason and double-check all paperwork for accuracy.

Reasons for denial can include one or more of the following:

  • Insufficient income, length of employment, or documentation
  • Credit rating does not meet the lender’s minimum requirements
  • Debt-to-income ratio (DTI) does not meet lender’s requirements
  • Bankruptcy or foreclosure history
  • Problems with property appraisal
  • Lack of co-signer, if required
  • Missing or incomplete application or documentation
  • Insufficient down payment

If down payment (or lack thereof) is the issue, putting down more money is a quick fix. Other reasons, such as not meeting minimum credit score requirements, are not as easy to remedy. You may have to work on these items for a period of time and then reapply for a loan.

Work on Repairing Credit

If you are denied based on credit, the reasons may vary. Insufficient credit history or low credit score may result in denial. Problems like bankruptcy or foreclosure may prevent a lender from approving you. If you don’t have enough credit history, the lender may approve the loan if you have a qualified co-signer. Once a positive payment record is established, it may be possible to remove the co-signer.

A negative credit history can take some time to repair. Review the credit report and dispute any incorrect information. Pay off negative accounts or contact the creditor to offer a settlement to improve the overall credit rating. Try to open a secured credit card and make all payments on time to establish a positive payment history.

Reduce Debt-to-Income Ratio

A denial based on a debt-to-income ratio (DTI) that is too high is an indication that you carry too much debt or are trying to buy more property than you can afford. At this point, you have two choices: Pay off some of the debt or find a house at a lower price range.

To prepare to apply for a mortgage, review all credit reports and address issues. Review all finances and use online tools to determine your debt-to-income ratio. Finally, obtain loan pre-approval from a lending company BEFORE you start shopping for your first home.


An associate editor, working in tandem with global teams while residing in Minnesota. She has a strong interest in economic growth and holds board positions in various non-profit organizations.

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