Why Mortgage Loans Get Denied—and How Borrowers Can Avoid It

For many aspiring homeowners, securing a mortgage is one of the most significant steps in their journey toward homeownership. While most applications proceed smoothly, there are cases where a loan may be denied. Understanding the reasons behind mortgage denials and how to prevent them can save borrowers both time and heartache.

Here’s a breakdown of the most common reasons mortgage loans get denied—and practical steps borrowers can take to improve their creditworthiness.

Insufficient Credit History or Low Credit Score

A key factor in assessing a borrower’s financial reliability is their credit score. This serves as a numerical representation of the borrower’s creditworthiness, providing lenders with an indication of how likely the borrower is to repay the loan on time.

Scores below a certain threshold (typically 620 for conventional loans) may lead to a denial, although government-backed loans like FHA or VA loans allow for scores as low as 580. Regardless of the loan program being utilized, a low credit score or insufficient credit history may affect a borrower’s approval.

How to avoid this:

Borrowers should check their credit report before applying for a mortgage and dispute any errors or inaccuracies. By law, anyone in the US can obtain one free credit report a year from each of the three major credit reporting agencies. Taking steps to maintain or improve a strong credit profile can improve the chances of getting approved, and open doors to more loan options and lower rates.

One of the quickest ways to boost a credit score is by reducing the credit utilization ratio, which compares the amount of credit being used to the total credit limit. Ideally, borrowers should aim to keep utilization below 30% of their total available credit—and below 10% for optimal results. Two other effective strategies to raise a credit score are avoiding new debt and making all payments on time.

For those with a limited credit history, establishing small lines of credit and using them responsibly can demonstrate creditworthiness.

High Debt-to-Income Ratio (DTI)

Although many factors are used to determine if a borrower is credit worthy, one of the key pieces of information lenders rely on is the debt-to-income ratio. A DTI compares a borrower’s monthly debt payments to their gross monthly income. This ratio indicates what percentage of a borrower’s income needs to go toward paying debt. In general, the lower the DTI, the better.

What’s considered an acceptable DTI ratio varies based on the loan program and other factors, such as the borrower’s overall financial picture, but in general, lenders prefer the total debt ratio to be less than 43%. If this ratio is too high, it could indicate that a borrower might not be able to handle additional financial obligations and the loan may be denied.

How to avoid this:

Borrowers should aim to pay off or reduce outstanding debts before applying for a mortgage. Some popular approaches to paying down debt include the debt snowball  and debt avalanche methods. Also, to help maintain a favorable DTI, mortgage applicants should not take on new loans, open new lines of credit or incur new credit card debt during the application process.

Job Instability or Gaps in Employment

When applying for a mortgage, lenders typically want proof of at least two years of recent work history. Gaps in employment might not be a deal breaker if the borrower has other strong financial factors, such as large reserves, rental income, dividends, annuities, social security payments, or spousal or child support, but they could be.

Frequent employment gaps, especially those lasting six months or more, can raise red flags about financial stability.

How to avoid this:

Borrowers should maintain consistent employment, ideally within the same field, for at least two years before applying. If a gap in employment is unavoidable, providing a clear explanation and supporting documentation can help reassure lenders.

Inadequate Savings for a Down Payment or Closing Costs

Although it’s a myth that 20% down is required to buy a home, borrowers will need to provide proof of sufficient funds to cover a down payment and closing costs. Depending on the loan program and financial situation of the borrower, a few months’ worth of mortgage payments in reserve may even be required.

There are loan programs that do not require a down payment, like the USDA RD or VA loan, but all loans will have closing costs. A lack of savings to cover these costs can result in a denial.

How to avoid this:

Borrowers should work with a Loan Officer even if they are only preparing for future homeownership. Loan Officers play a pivotal role in turning house hunters into homeowners by assessing financial readiness, providing loan options and creating a savings plan for a down payment.

Working with a Loan Officer early in the process can help borrowers get a better picture of the true cost of homeownership in order to better prepare for these expenses. By assessing the borrower’s financial situation, a Loan Officer can clarify approximately how much of a down payment is needed and help create a strategy for increasing savings.

Additionally, Loan Officers can provide information about state, local and national down payment assistance programs, gift fund options, and seller concessions that may reduce the amount needed for a down payment and/or closing costs.

Issues with the Property Itself

Sometimes the denial isn’t about the borrower, but the property. Problems such as a low appraisal value, unresolved title issues, condition of the home, or the property not meeting lender requirements can derail a loan.

How to avoid this:

Working with an experienced real estate agent is key in this situation. Realtors can help buyers avoid loan denial caused by property-related issues by pre-screening the property for signs of deferred maintenance, doing a thorough review of comparable sales to ensure the property isn’t overpriced, and collaborating with the Loan Officer to get a better understanding of the property requirements for the specific loan program their client is applying for. FHA, VA, or USDA loans for example, have strict guidelines regarding safety, soundness and habitability that a property must meet in order to be mortgageable.

Hiring a professional home inspector early in the process can identify potential red flags, like foundation issues, mold, or plumbing problems.Conducting a pre-appraisal or inspection allows borrowers to negotiate the price or request repairs from the seller before proceeding.

Major Financial Changes During the Process

Borrowers should be proactive during the loan process by communicating with their Loan Officer before making any major decisions that could cause unintended consequences. Once an application has started, it’s best to avoid the following:

Making large purchases:

Borrowers should delay buying cars, furniture, or other big-ticket items until after closing. Large purchases can increase debt-to-income (DTI) ratios, which could disqualify them from their approved loan terms.

Changing jobs:

Any changes in income, reduction in work hours or new employment could raise red flags with underwriters and delay or deny the loan.

Applying for new lines of credit:

New credit inquiries can lower credit scores or increase debt. Borrowers should hold off on opening new credit cards or taking out loans until their mortgage is finalized.

Overdrawing accounts or missing payments:

Borrowers need to show they have sufficient funds to cover a down payment and/or closing costs and demonstrate fiscal responsibility. Overdrawing accounts, bouncing checks and missing scheduled payments can signal financial instability to lenders.

The Bottom Line:

While the mortgage approval process can feel overwhelming, borrowers who work with a  Loan Officer early in the process to get sound advice and personalized strategies are more likely to pass underwriting and close on their home successfully. Being proactive and well-informed helps borrowers avoid common pitfalls that may lead to a loan denial.