Chris  Schmidt
Chris Schmidt
Owner/Broker

Why Would a Lender Deny a Mortgage?

Wondering why a lender would deny a mortgage? A lender could deny a mortgage for many reasons, whether due to your personal finances or issues with the property you’re looking to buy.

In this post, Chris Schmidt and our Houston real estate experts at Your Home Sold Guaranteed Realty - Chris Schmidt Team will share some of the top reasons lenders deny mortgages.

Key Takeaways:

  • Most lenders have minimum credit score requirements in order to qualify for a loan. For conventional loans, this is typically around 620. For FHA loans, it can be as low as 580. 
  • A high debt-to-income (DTI) ratio is when your monthly debt payments are too high compared to your gross monthly income. Usually, a lender might deny a mortgage if you have a DTI ratio above 43% to 50%.
  • If the property appraises for significantly less than its asking price, this increases its loan-to-value ratio, which can cause the lender to reconsider issuing the loan.

Why Would a Lender Deny a Mortgage?

Low Credit Score

To lenders, a low credit score is a sign of a riskier borrower who has a higher chance of defaulting on their mortgage loan

Most lenders have minimum credit score requirements in order to qualify for a loan. For conventional loans, this is typically around 620. For FHA loans, it can be as low as 580. However, be sure to check with your lender to see what their requirements are.

High Debt-to-Income Ratio

A high debt-to-income (DTI) ratio is when your monthly debt payments are too high compared to your gross monthly income. Usually, a lender might deny a mortgage if you have a DTI ratio above 43% to 50%.

Insufficient or Unstable Income

Lenders want to see that you have sufficient income to cover the down payment and monthly mortgage payments, along with your other debts. They also need to see proof that your income is stable.

Recent job changes, gaps in employment, or frequent job-hopping can make lenders question the stability of your income source, leading them to deny a mortgage.

Major Changes in Your Finances

Major changes in your finances right before you apply for a mortgage can cause the lender to deny your loan. Changes such as losing your job, experiencing a reduction in your income, accumulating a large amount of debt, major change in spending habits, or opening new credit accounts are often red flags to lenders.

Lenders continuously monitor your financial status up until the mortgage closes, so any major changes throughout the home-buying process can jeopardize your loan approval.

Issues with the Property Appraisal

If the property appraises for significantly less than its asking price, this increases its loan-to-value ratio, which can cause the lender to reconsider issuing the loan. In such cases, you’ll likely need to renegotiate the price with the seller to align with the appraised value. 

Alternatively, you may need to increase your down payment to cover the difference between the loan amount and the purchase price.

Other issues that come up with the appraisal like the discovery of necessary repairs, can make the property look risky to the lender, causing them to reconsider issuing the loan.

Title Issues

Problems uncovered during the title search, such as liens, encumbrances, or ownership disputes, can prevent the loan from being approved. A clear title is essential for loan approval, and any unresolved issues must be addressed before proceeding with the purchase.

Changes in Loan Terms

Loan terms can change from the time you get pre-approval to the moment you send in your official application. Significant increases in the interest rate, adjustments to the necessary loan amount, or changes to the lender’s contract terms can lead to a loan denial if you no longer meet their criteria or no longer wish to work with them.

To mitigate the risk of interest rate changes, discuss mortgage rate lock options with your lender to secure a stable interest rate during the approval process.

Fraud or Misrepresentation

If the lender discovers evidence of fraud or misrepresentation by you or other parties involved in the transaction, they can deny your loan. Accurate and truthful information is crucial throughout the application process to maintain eligibility and trust with the lender. 

It’s also essential to disclose all relevant financial information. Failing to disclose all existing debts and liabilities on your loan application is considered fraud and can result in denial.

Changes in Legal Regulations

New lending regulations or guidelines from local government agencies can impact the lender’s decision to approve or deny the loan. Such changes might affect your eligibility or alter the lender’s risk assessment, leading to potential denial if new criteria are not met.

How Can You Avoid Your Loan Being Denied?

  • Maintain Financial Stability: As soon as you know you want to apply for a mortgage, take any necessary steps to improve your finances. Maintain stable employment, avoid large purchases or new debt, keep your credit utilization low, and make all your credit payments on time. 
  • Work with Professionals: Work closely with your realtor and lender to navigate potential appraisal and title issues. They can offer guidance and solutions to ensure the property meets all requirements for loan approval.
  • Prioritize Communication: Maintain open communication with your lender throughout the mortgage application process. Let them know immediately if there are any changes to your financial situation. Early transparency and communication can help mitigate potential problems and prevent your loan from being denied.

Call or Text Chris Schmidt Today to Get Your Mortgage Loan Process Started!

Your Home Sold Guaranteed Realty - Chris Schmidt Team. Why Would a Lender Deny a Mortgage?
Chris Schmidt

Chris Schmidt is the owner of Your Home Sold Guaranteed Realty - Chris Schmidt Team. Chris has 20+ years of experience in real estate and is deeply familiar with the Houston housing market. He’s a member of the Houston Association of Realtors and has earned the Graduate, Realtor Institute designation from the National Association of Realtors.

He began his real estate career in 2004, when he joined Coldwell Banker United as a broker associate. He worked as a broker associate for over 10 years before deciding to begin his own real estate and mortgage lending team.

If you work with Chris Schmidt and the agents at Your Home Sold Guaranteed Realty - Chris Schmidt Team, you’ll have nothing to worry about on your home purchase or sale of your home. We’ve received numerous 5-star reviews from past clients who loved working with us. Clients value working with our team because we always take the time to understand their real estate goals and learn about what’s most important to them. Call or text 713-322-5604 today!

Faster

  • Get pre-approved in minutes
  • Closings on average in 20 days or less

Cheaper

  • 1% and 3% down options
  • Borrower Assistance Programs
  • Savings that average over $9,400 versus large banks and retail lenders

Easier

  • User-friendly technology allows you to track the status of your loan throughout the process

To Discuss Your Home Sale or Purchase, Call or Text Today and Start Packing!