Getting denied for a mortgage feels like a gut punch. You’ve spent so much time looking for a new home, working with realtors, and speaking to friends and family about the process. After all of that, you’re left feeling defeated and wondering "Why would a mortgage be denied?", "What did I do wrong?"

Don’t worry, you’re not alone! In 2024, 1 out of every 5 people that applied for a mortgage were denied

The good news is that you can take steps to reapply and put yourself in a better position with the lender.

Your first step should be to sign up for our mortgage application tool which will dramatically improve your chances of getting a mortgage.

At My Home Pathway, a technology driven risk improvement platform, we've worked with countless borrowers and lending institutions and we know that many denials come down to a few key issues that borrowers can fix.

This article breaks down these issues and offers tips to avoid them.

Key Reasons Mortgages Are Denied

If you can relate to any of these reasons for mortgage denial, don’t worry, there’s still hope through My Home Pathway! Start Here.

Poor Credit Score and History: A poor credit score (typically under 620) and a history of late payments or defaults raises red flags for lenders who see you as a risky borrower. [source]
Insufficient Income or Employment History: Lenders need to see stable employment and sufficient income, typically for at least two years, to ensure you can handle monthly mortgage payments.
Cash In The Bank and Asset Problems: Insufficient down payment funds, undocumented assets, or large unexplained deposits can cause lenders to question your financial stability and reject your application.
Property Issues: Issues like low property appraisals, structural problems, or zoning violations can derail mortgage approval since the property serves as collateral.
Incomplete applications: Incomplete applications with missing or incorrect information almost guarantee denial, so double-check all details and documentation before submission.

Keep in mind, you are protected by the Equal Credit Opportunity Act and if your mortgage application is denied for any reason related to your identity, you do have options for recourse. Know your rights!

#1 Credit Issues

Lenders look at your credit score as a window into your financial habits. Think of it as your money report card - it shows them how well you've handled bills, loans, and credit cards in the past.

They're basically trying to answer one key question: "Can we trust this person to pay back such a large mortgage loan?"

Your credit history tells them if you've been reliable with payments.

And lenders take this stuff seriously. After all, a mortgage is likely the biggest loan you'll ever take out, so banks need to feel confident you'll make those monthly payments like clockwork.

Credit problems that trigger denial:

Late or missed payments
High credit card balances
Recent collections or charge-offs
Bankruptcy in the past 2-4 years

However, there are steps to address credit issues. We’ll explore two main problems: low credit scores and errors in credit reports.

Low Credit Score

Getting turned down for a mortgage because of a bad credit score is pretty common these days. Most banks want to see at least a 620 for a conventional mortgage loan, and things like missing payments, maxed-out credit cards, or carrying too much debt can really tank your score.

The good news? You can turn things around.

Start by pulling your credit report and making sure everything looks right. Get those bills paid on time, and try to chip away at any debt you're carrying.

A good rule of thumb is keeping your credit card balances below 30% of your limits. That brings down your credit utilization ratio which is something lenders look at. It takes some work, but with time and patience, you can boost your score, maintain a healthy credit, and get closer to that mortgage approval.

Here are 12 ways to improve your credit score.

Errors in Credit Report

Here's something that might surprise you - sometimes it's not even your fault when your mortgage application gets rejected. Credit report errors happen more often than you'd think, and they can throw your timeline to close right out the window.

That's why we tell our customers to check their credit reports regularly. If you spot something fishy, don't just let it slide.

File a dispute with the credit bureau and make sure you've got the paperwork to back up your case. Being proactive about catching and fixing these mistakes can make all the difference between getting approved or denied for your mortgage.

#2 Income Issues & Unstable Employment

When lenders look at your job history, they're really asking, "Can this person keep bringing home a steady paycheck?" It’s that simple.

If you’ve ever rented an apartment you’ll remember that landlords want to know you've got a reliable income to pay the rent each month. But with a mortgage, the stakes are much higher.

Here's what you need to know about employment status:

For W-2 Employees: Most lenders want to see at least two years of steady employment income. Job hopping or frequent career changes can raise red flags, even if you're making more money. They're looking for predictable, consistent paychecks that show you can handle a monthly payment.

For Self-Employed (1099): If you work for yourself, lenders will typically review your last two years of tax returns to verify your income. They'll look at your business's stability and whether your income is growing, declining, or holding steady. Variable income can make lenders nervous, so be prepared to explain any significant changes in your earnings.

Key Points About Income:

Regular overtime and bonuses can count, but only if you have a solid history of receiving them
Part-time jobs need a two-year history to be included
Recent changes in pay structure (like switching from salary to commission) might require more documentation
Side gig income usually needs to be established for two years to count
Gaps in employment will need to be explained and documented

Remember, it's not just about how much you make - it's about proving you have a reliable, consistent income that will continue into the future.

Most lenders want to see that you've been holding down a job for at least a couple of years.

It's like building trust - the longer you've been at it, the more confident they feel about lending you money.

Jumping from job to job? That might make them nervous, kind of like how you might think twice about lending money to a friend who can't seem to stick with one job.
Planning to switch jobs? Here's a tip: talk to your loan officer first. They're like your guide through the mortgage maze and can tell you if that career move might throw a wrench in your home-buying plans.

The bottom line is pretty simple - if you're thinking about buying a home, try to keep your job situation steady for at least two years. It shows lenders you're the kind of reliable borrower they're looking for.

#3 Cash In The Bank & Asset Issues

Think of applying for a mortgage like trying to convince someone you can handle a really expensive gym membership - lenders want proof you can handle those monthly payments without breaking a sweat.

If your paycheck looks a bit slim compared to the mortgage payments you're asking for, that's going to raise some eyebrows.

Let's talk about money in the bank - it's a make-or-break part of getting a mortgage. Here's what trips people up:

High Debt-to-Income Ratio

A high debt-to-income (DTI) ratio will lead to more questions from the lender. Your DTI measures the portion of your income going toward total debt payments. Your essential expenses like rent, student loan payments, etc.

Most lenders want to see you using no more than 43% of your monthly income for debt payments, but they'll really smile if you're at 36% or lower. [source]

Think about it - if you're already stretching your paycheck thin just covering existing bills, adding a mortgage payment could cause more financial struggles. It’s important that you understand how to structure your mortgage agreement.

And remember, there are specific categories that banks look at for calculating DTI and credit card payments is only one of those categories.

Front-end DTI: Compares your income to your housing costs, like mortgage payments, property taxes, and homeowners insurance
Back-end DTI: Compares your income to all your monthly debt payments, including credit cards, auto loans, student loans, and more

Want to look better to lenders?

Start by tackling those high-interest credit cards and maybe consider paying off that car loan early if you can.

And here's a pro tip: while you're in the middle of applying for a mortgage, avoid the temptation to finance new furniture or a shiny new car. Those purchases can throw your numbers off at exactly the wrong time.

Down Payments

Coming up short on that down payment is a common roadblock. You might have a solid job and great credit, but if you can't pull together enough cash upfront, lenders might have to say no.

And here's something that surprises many people: it's not just about having the money - you need to show where it came from. Those big deposits in your account? Lenders want to know if that's your savings, a gift from family, or something else.

If you can't explain where the money came from with proper documentation, it could raise red flags.

Safety Nets

Then there's the safety net issue. Lenders want to see that you've got some money left in the bank after making your down payment.

Think of it as a cushion for unexpected expenses or emergencies - without it, they worry you might struggle with payments down the road.

Remember that generous cash gift from Aunt Martha? Better have a paper trail for that.

Large deposits without proper documentation can actually hurt your loan application, even if the money was legitimately given to you.

How to Save For That Down Payment!

It's not just about how much money you make - it's about the whole picture of your finances.

Before you dive into mortgage applications, take a good hard look at where your money's going each month. Maybe you could cut back on those streaming subscriptions or meal deliveries?

Here are the most common expenses that people cut to start saving money:

Food delivery apps and takeout - those convenience
fees, delivery charges, and markups add up fast, plus you're probably tipping more than you would dining in.
Unused subscriptions - streaming services, gym memberships, or subscription boxes that you've forgotten about but keep charging your card each month.
Daily coffee runs - that $5 morning latte habit can cost you over $1,800 a year; making coffee at home can save a ton.
New car payments - there's nothing like that new car smell, but if you want to save more for a mortgage down payment, you may want to buy second hand and avoid a large monthly payment.
Impulse grocery shopping - going to the store hungry or without a list leads to unplanned purchases and wasted food.
Bank fees - overdraft charges, ATM fees, and monthly maintenance fees that could be avoided by switching banks or maintaining minimum balances.
Brand-name products - buying generic for basics like medications, cleaning supplies, and pantry staples can cut your expenses significantly.

And we know, creating a budget isn't exactly most people’s idea of a fun time, but it's like creating a roadmap for your money. You’ll be surprised what you find when you sit down and comb through your expenses.

And if you do it right, you can spot opportunities to save more and show lenders you're serious about managing your finances.

#4 Property Issues

Lenders want to make sure the house is worth what you're paying for it - after all, it's their investment too.

If the home's value comes in low during the appraisal or there are serious problems with the structure, you might hit a wall with your mortgage approval.

Low Appraisal Value

When a home's appraised value comes in lower than what you've agreed to pay, it can stop your mortgage in its tracks. Simply put: if you're trying to buy a house for $300,000 but it only appraises for $275,000, your lender sees that gap as a big risk.

You've got a few options if this happens.

You could try to get the seller to lower the price to match the appraisal, or you might need to come up with a bigger down payment to make up the difference.

Structural Problems

Major problems with a house - like foundation cracks, bad plumbing, or a roof that's falling apart - can kill your mortgage approval fast.

These aren't just cosmetic issues that you can fix with a fresh coat of paint; they're serious problems that make lenders worry about the house's safety and value.

#5 Incomplete or Incorrect Application

Making mistakes on your mortgage application - even small ones - can bring the whole process to a screeching halt.

The underwriters who review your application are looking at every detail and they won't hesitate to reject it if things don't add up.

Before you submit your loan application, go through it with a fine-tooth comb. Let's look at what paperwork you might be missing and the kind of mistakes that typically trip people up.

Forgetting to sign all required forms and disclosures - every missing signature means a delay in processing.
Leaving employment gaps unexplained on your application - lenders need to know what you were doing during any work breaks.
Not reporting all sources of income, including side jobs or rental income - more income usually helps your case.
Sending outdated pay stubs and bank statements - lenders need your most recent documents, usually within the last 60 days.
Missing tax returns or sending incomplete ones - make sure you include all schedules and pages.
Not explaining large deposits in your bank account - lenders need to verify where this money came from.
Forgetting to include all debts and monthly obligations - being upfront helps avoid surprises during underwriting.
Providing inconsistent information across different forms - double-check that your numbers match everywhere.
Not including divorce decrees or child support documentation if applicable - these affect your monthly obligations.
Failing to respond quickly to requests for additional information - delays can cause your rate lock to expire.

Pro Tip: If you need help applying for a mortgage, My Home Pathway is a free tool that could help you! Learn how it works.

Bonus: A Few More Reasons (That Don’t Happen As Often)

Financial Changes: Last-minute changes to your finances can make mortgage lenders uneasy, especially when they spot unusual deposits or withdrawals in your accounts.

Large Bank Transactions: Big deposits in your bank account - especially ones over 25% of your monthly income - will need to be explained to your lender. Keep documentation for any major deposits, whether they're work bonuses, tax refunds, or family gifts, to avoid delays in your mortgage approval. [source]

Increased Debt: Taking on new debt during your mortgage application process can put your approval at risk, so focus on paying down existing loans and avoid taking on any new ones until you've closed on your home.

Not Meeting Mortgage Loan Program Requirements: Each type of mortgage comes with its own set of rules - what works for a conventional mortgage loan might not cut it for an FHA loan. Let's look at what you'll need to qualify for these different types of mortgages so you can figure out which one might work best for you.

Conventional Loan Requirements: For a conventional mortgage loan, you'll need decent credit - typically between 670 and 739 - and your monthly debts shouldn't eat up more than 43% of your income (though staying under 36% will get you better rates). While you only need to put 3% down, keep in mind that a larger down payment can help you snag better terms and lower monthly payments. [source]

FHA Loan Criteria: If your credit score isn't perfect, an FHA loan might be your ticket to homeownership - they'll work with scores as low as 580, though better credit always means better rates. Just keep in mind that FHA loans come with an extra step: they need to make sure the house you're buying is in good shape, so it'll need to pass a special inspection for safety and condition.

Steps to Improve Your Chances of Approval

Here's what you can do to boost your chances of getting that mortgage approved:

Pull your credit report and look for any errors - disputing mistakes and paying down credit card debt now can boost your score before applying. (You can get a free credit report here)
Start saving for a bigger down payment - this not only improves your chances of approval but could get you better interest rates and lower monthly payments.
Create and stick to a budget to show lenders you've got solid money management skills - track your spending and build up a credit history of consistent saving.
If you've been denied before, carefully review the reasons why and fix those specific issues before applying again.

And if you've been denied before? Don't get discouraged. Use that experience to understand exactly what went wrong and fix those issues before trying again. Now you understand why underwriters deny loans and you can put yourself in a better position to be accepted!

Summary

Getting a mortgage isn't always smooth sailing - plenty of things can trip you up along the way, from credit score issues to income problems to the house itself not passing muster. But here's the good news: knowing what lenders are looking for can help you avoid these common roadblocks.

Success with an application really comes down to doing your homework. Get your

credit score in shape, keep your job steady, and stay on top of your finances. These might seem like small steps, but they make a big difference when you're sitting across from a lender. It's like building a strong foundation before putting up the house - the better prepared you are, the smoother the process will be.

And remember, you don't have to figure all this out on your own. My Home Pathway is ready to walk you through the mortgage process and help turn your homeownership dreams into reality.

Frequently Asked Questions

What should I do if my application is denied due to a low credit score?

If your application gets denied due to a low credit score, check your credit report for errors and dispute any inaccuracies. Also, prioritize making on-time payments and paying down debt to boost your score.

How can I improve my debt-to-income ratio?

To improve your debt-to-income ratio, focus on paying down high-interest debts like credit cards and avoid taking on new debt while you’re applying for a mortgage. That way, you'll boost your chances of securing better terms!

What should I do if I find errors in my report?

If you find errors in your report, dispute them with the credit bureau right away and include any financial information, supporting documents and other tax documents. Keeping an eye on your report regularly can help you spot these mistakes early on!

How can I address a low appraisal value?

If you're facing a low appraisal value, try renegotiating the purchase price with the seller or putting down a larger down payment. Getting a detailed appraisal report can also help you make sure you’re paying a fair price for your home.

What steps can I take to improve my chances of mortgage approval?

To boost your mortgage approval chances, check your credit score and fix any mistakes, and make sure to save up for a bigger down payment. Getting your finances in order with a solid budget will also show lenders you mean business! A strong credit score makes all the difference.

Disclaimer: My Home Pathway is a technology-driven risk improvement platform. We are not a mortgage broker or lender and are not representatives of any home loan programs. We are not a credit repair company, HUD-certified counseling agency, or one-on-one home counselor. While we offer mortgage-related services, we are not a bank, non-profit organization, foundation, or real estate agency. We may partner with those organizations to provide content and access related to our services.

The information provided is for educational purposes only and should not be considered credit repair advice or housing counseling services. For credit repair assistance or housing counseling, please consult with appropriate certified professionals or HUD-approved agencies.

Top 5 Reasons Mortgages Are Denied and How to Avoid It