What to Do If Your Mortgage Is Denied (And How to Spot the Warning Signs Early)

Few things are more stressful than having your mortgage denied right before closing or after pre-approval. Unfortunately, it happens more often than many buyers realize. That’s why it’s important to not only understand what causes loan denials, but also how to recognize the signs your mortgage will be declined — and what to do next if it happens.

In this article, we’ll break down the common reasons loans fall through, the red flags to watch for, and smart steps to take if your financing is denied.

Common Reasons Mortgages Are Denied

Mortgage applications can be declined at various stages — even after pre-approval. Below are the most frequent reasons lenders issue rejections:

1. Credit Score Drops

A late payment, new credit inquiry, or increased balances can drop your score below the lender’s minimum threshold.

2. High Debt-to-Income Ratio (DTI)

Lenders use your DTI to evaluate how much of your income is already going toward debt. If your monthly obligations are too high, your mortgage may be denied — even with a good credit score.

3. Insufficient or Unstable Income

If your job status changes, overtime disappears, or your income isn’t well-documented, lenders may pull back their approval.

4. Incomplete Documentation

Missing tax returns, W-2s, pay stubs, or asset verification can stall or void an application.

5. Low Appraisal

If the home appraises below the purchase price, the lender may not agree to the full loan amount unless the difference is covered by a larger down payment.

6. Issues With the Property

Lenders may reject homes with structural issues, code violations, or unpermitted work — especially for FHA, VA, or USDA loans.

Signs Your Mortgage Will Be Declined

Most borrowers don’t realize the warning signs until it’s too late. Watch for these red flags throughout the loan process:

• You’re suddenly asked for more documents without explanation

• Your lender goes silent or delays communication

• The underwriter requests additional verifications multiple times

• Your credit report was pulled again, or your score changed

• Your appraisal came in low

• You took on a new credit card or car loan during escrow

• Your debt-to-income ratio increased due to an overlooked obligation

If you experience any of these, speak with your lender immediately to avoid surprises.

What to Do If Your Mortgage Was Denied

If you’ve already received a denial notice, here’s how to move forward productively:

1. Review the Adverse Action Notice

Lenders are required by law to send a document explaining why your loan was denied. This can point you toward the exact issue, whether it’s credit, income, or another factor.

2. Ask for a Full Explanation

Don’t settle for generic answers. Request a clear explanation from your loan officer or underwriter. You need specifics in order to fix the issue — especially if you plan to reapply elsewhere.

3. Analyze Your Loan Estimate

Was the rate or fee structure unusually high? Were there hidden costs or junk fees? Use Loan Watch to review and score your Loan Estimate and see how it compares to other lenders.

4. Consider Loan Alternatives

Depending on your profile, a different loan type may offer more flexibility. Tools like Loan Compass can evaluate your income, credit, and goals to match you with better loan options.

5. Improve Your Profile

• Pay down debt to lower your DTI

• Avoid new credit activity

• Gather complete income and asset documentation

• Wait a few months if necessary to rebuild your score

How to Avoid Denial in the Future

To reduce the risk of denial, consider these best practices:

• Get pre-approved, not just prequalified

• Don’t change jobs or make large purchases before closing

• Keep communication open with your loan officer

• Double-check your credit report early

• Use our Loan Affordability Calculator to ensure your target budget fits your income and DTI

FAQs: Mortgage Denied? What You Need to Know