You’re under contract to buy a home and suddenly you get an awful call from your lender: Underwriting denied your loan.
One of the most stressful scenarios is when your mortgage financing falls through. While it can feel like a devastating setback, there are steps you can take to address the issue, minimize the damage, and keep your home-buying journey on track.
Tips to Avoid a Mortgage Denial While Under Contract
Understanding the reasons behind a mortgage denial can help you address the issue more effectively. Here are the most common causes:
1. Credit Issues
Changes to your credit score during the loan process, such as missed payments or increased debt, can cause lenders to withdraw their approval.
Solution: Monitor your credit score throughout the process and avoid opening new credit accounts.
2. Appraisal Problems
If the home’s appraised value is lower than the purchase price, lenders may not approve the full loan amount.
Solution: Negotiate with the seller to lower the price or pay the difference out of pocket.
3. Changes in Employment or Income
Lenders require stable income to approve a mortgage. Job loss, income reduction, or changes in employment status can jeopardize financing.
Solution: Avoid changing jobs, quitting your job, or reducing income sources during the mortgage process.
4. Debt-to-Income Ratio (DTI) Issues
If your DTI increases due to new debts, those new monthly payments might push you over the allowable DTI limit.
Solution: Hold off on major purchases until after closing.
5. Documentation Errors or Delays
Incomplete or missing paperwork can cause delays or denials.
Solution: Work closely with your lender to provide accurate and complete documentation promptly.
What to Do if You Get Denied
If your mortgage financing falls through, the first step is to stay calm and evaluate your options. This is where a good mortgage broker earns their money – lean on their experience and navigate these choppy waters and get your loan back on track
Determine the Cause
Talk with your lender to understand why your financing fell through. Once you know the reason, you can take targeted steps to address it. For example:
- Credit issues may require improving your score.
- Appraisal problems might mean negotiating the price or choosing another home.
- Debt-to-income issues might mean you might need a bigger down payment, or require some debt to be paid off at closing to lower your DTI.
Communicate with Your Real Estate Agent
Your agent can help you navigate the situation by:
- Contacting the seller to request an extension on the contract.
- Suggesting alternative financing options or lenders.
Step 2: Explore Alternative Financing Options
If your original lender denies your mortgage, consider these alternatives:
1. Shop Around for New Lenders
Mortgage professionals, and companies, are not created equal! Different lenders have varying criteria for approving loans. Some may be more flexible with credit scores, income requirements, or DTIs.
Tip: Ask your real estate agent for recommendations or explore online lenders for additional options.
2. Consider Different Loan Types
Switching to a different loan program may increase your chances of approval:
- FHA Loans: Easier to qualify for with lower credit score requirements.
- VA Loans: Ideal for veterans and active-duty service members with lenient terms.
- USDA Loans: Great for buyers in rural areas, often requiring minimal down payments.
3. Explore Co-Signer Options
Adding a co-signer with strong credit can strengthen your application. However, ensure the co-signer understands their financial responsibility.
Step 3: Reassess Your Home Search
If alternative financing isn’t an immediate solution, consider adjusting your home-buying strategy:
1. Look at Lower-Priced Homes
If your financing fell through due to DTI or appraisal issues, exploring more affordable homes may resolve the problem.
2. Negotiate with the Seller
Ask the seller to reduce the price or cover some closing costs to make the transaction more feasible.
3. Delay Your Purchase
If your financial situation needs improvement, take time to:
- Pay down debt.
- Save for a larger down payment.
- Stabilize your income.
Step 4: Know Your Rights and Review the Contract
If you’re unable to secure financing, it’s important to understand your rights and obligations:
Financing Contingency
Most real estate contracts include a financing contingency, allowing you to back out of the deal without penalty if your loan is denied. Ensure you meet the contingency’s deadlines and requirements.
Earnest Money Deposit
If you back out of the contract due to a failed loan, you may be entitled to a refund of your earnest money deposit, depending on the terms of the contract.
Legal Advice
Consult your real estate agent or a lawyer to clarify contract terms and ensure you’re protected.
Step 5: Strengthen Your Financial Position
Whether or not you move forward with the purchase, improving your financial health can prevent similar issues in the future:
Improve Your Credit Score
- Pay down existing debt.
- Avoid late payments.
- Dispute any inaccuracies on your credit report.
Build Savings
- Save for a larger down payment to reduce your LTV ratio.
- Create an emergency fund to cover unexpected expenses.
Stabilize Employment
- Avoid job changes during the mortgage process.
- Provide documentation showing consistent income.
Final Thoughts
While having your mortgage financing fall through is undoubtedly stressful, it’s not the end of your home-buying journey. By understanding the reasons behind the issue, exploring alternative options, and strengthening your financial position, you can recover and find the right solution.
Work closely with your real estate agent and lender to navigate the process and ensure you’re prepared for future opportunities. With persistence and careful planning, you’ll be back on track to achieving your homeownership goals.
For more insights, explore these related articles:
Related Posts

The Evolution of Mortgage Lending in the U.S.: From the Great Depression to Modern Housing Crises
The history of mortgage lending in the United States is a fascinating journey through economic highs and lows, government interventions, and financial innovations.

What Happens After the Home Inspection: Negotiating Repairs and Price Adjustments
The home inspection is a critical step in the homebuying process, providing a detailed look at a property’s condition and uncovering potential issues.

The Role of Credit Scores in Mortgage Approval: How Lenders Evaluate Risk
When applying for a mortgage, one of the first questions a lender will ask is, “What’s your credit score?” This three-digit number plays