Before you get final approval for a mortgage, your application will have to go through an underwriting process. An underwriter will thoroughly review documentation to assess your financial situation and ability to repay a mortgage. Your application can get denied in underwriting for a variety of reasons, even if you got preapproved.
Low Credit Scores
Making a large purchase, using a high percentage of your total available credit, making a late payment and applying for a new line of credit can all cause your credit scores to take a hit. If that happens right before you submit a mortgage application, there may be enough of a drop for your application to be denied. When you’re preparing to buy a house, focus on keeping your credit utilization ratio low and making all your payments on time.
High Debt-to-Income Ratio
The ratio of your monthly debt payments to your monthly income should not exceed a certain percentage. Guidelines vary somewhat from lender to lender. If you get denied because your DTI ratio is too high, you can pay off some debt to improve your chance of qualifying for a mortgage.
High Loan-to-Value Ratio
The amount of money you put down will be deducted from the purchase price and you’ll have to take out a mortgage for the rest. If you make a small down payment, the loan-to-value ratio (the percentage of the purchase price that you borrow) may be too high to meet the lender’s criteria, potentially causing your application to be rejected.
Insufficient Documentation
You will be asked to provide a series of documents such as pay stubs, tax returns and bank records. If you don’t supply everything requested, your mortgage application may be denied.
In some cases, the lender may need additional information. For example, if you had a large deposit into or withdrawal from your bank account, the lender may request a letter explaining the reason.
Change in Employment Status
When you apply for a home loan, a lender will look for evidence of stability. Switching jobs right before you apply for a mortgage can raise concerns for a lender. If things don’t work out, you may be unable to keep up with your mortgage payments.
A job change can be especially concerning to a lender if it involves a switch to a completely different field. You may have a successful track record in your old line of work, but branching out into a new area can bring a whole list of unknowns that can make a lender nervous.
Issues With the Property or Appraisal
A lender wants to know that giving you a mortgage will be a good investment. If a home inspection reveals a major problem, such as a damaged foundation or a leaky roof, your application may be denied. A lender may also reject your application if the property’s appraised value is less than the amount you intend to borrow. In that case, you will have to renegotiate the price with the seller or pay more out of pocket.
