Getting denied for a mortgage is one of the most discouraging moments in the home-buying journey. You’ve spent months searching, found the right home, and submitted your application — only to receive a rejection. The good news: most mortgage denials are preventable once you understand what lenders are looking for.
In today’s lending environment, with mortgage rates and qualification standards remaining strict, knowing the common pitfalls before you apply can save you significant time, money, and stress. Below, we break down the seven most common reasons home buyers are denied a mortgage — and what you can do about each one:
Your credit score is an important factor in the approval process. Your credit score determines your mortgage interest rate and a lender uses it to assess how much of a risk you are in paying back the loan. If your credit score is low or does not meet the minimum credit score for the particular loan program a lender will consider you too much of a risk and deny the loan application.
Actions that can lower your credit score, such as opening new lines of credit, personal loans, or missing bill payments can hinder the approval process because of the lower your credit score, the higher the risk you are to the lender.
Make sure you know your credit score before you apply for home financing. There are three credit bureaus that you can use to find your FICO credit score; those are Experian, TransUnion, and Equifax. Look over your credit report for accuracy and take action to make any needed corrections or improvements.
Different loan programs have different minimum credit score thresholds. Here is a general breakdown of what lenders typically require:
Knowing which threshold applies to your target loan program gives you a concrete score to work toward before you apply.
With high home prices, receiving gift funds for your down payment are great! However, large deposits into your bank account that are not specifically identified such as a payroll deposit will need an explanation of their source. Without a gift letter from that family member explaining the purpose and intention of the funds, any large deposits look suspicious to a loan processor and could make you appear as a risk to the lender. Funds for a down payment are required to come from an acceptable source. Acceptable sources for a down payment include the sale of your own assets like stocks or mutual funds, borrowing from a secured line of credit such as a Home Equity Line of Credit, Margin Loan or 401k loan or gift funds from a family member. Gifts are generally only allowed when purchasing a primary residence or second home. You cannot use gift funds to purchase an investment property on most loan programs. Gifts must also come from a close family member or other legitimate close relationship. Unacceptable sources of down payment include borrowing from an unsecured source like a credit card or signature loan, undocumentable cash deposits and large transfers from unknown sources.
Purchasing a home can be thrilling and a monumental life moment, and often times the next step in homeownership is to purchase home décor, furniture, or to start planning home improvements. It may be difficult to resist the urge, however making these major purchases or increasing the balances on your credit cards can be damaging during the home financing process. Your home loan application serves as a snapshot of your financial picture and you don’t want to do anything that could change that picture during the transaction process.
To a lender, over-drafting from your checking account could mean that you are a risk for paying back what you borrowed or could eventually cause your credit score to decrease and prevent you from getting approved.
It’s also worth noting that “buy now, pay later” (BNPL) services are increasingly being reported on credit files and can affect your DTI calculation — a common surprise for first-time buyers in 2025–2026.
When you take out a loan, the lender needs to know that this will be repaid. This depends on you having a steady stream of income from your job.
If you decide to change jobs between the time of pre-approval and the time of purchase, your employment history and income stream do not mean as much. While changing employment doesn’t always cause an issue there are situations that can definitely cause problems. Changing jobs within the same field is fine assuming you are a salaried employee — in fact, a move to a higher-paying role in the same industry is generally acceptable to lenders. Switching jobs can cause issues when any of the following are involved: commission income, bonus income, contract or temporary employment, 1099 employment or self-employment. With all of these situations, a history of income is required to verify future income expectations and meet the government’s Ability to Repay guidelines.
Gig-economy workers — such as those driving for rideshare platforms, delivering for app-based services, or working through freelance platforms — are treated as self-employed by lenders and typically need a two-year history of that income to have it counted toward qualification. If you are transitioning to gig or freelance work, plan accordingly before applying.
Besides the amount you have saved up for a down payment, loan processors will also look at the amount of debt you have compared to your income. This is called your debt-to-income ratio (DTI). For conventional loans underwritten through Fannie Mae’s Desktop Underwriter (DU), DTI can reach up to 50% with strong compensating factors; manually underwritten conventional loans are generally capped at 36%, extendable to 45% with a qualifying credit score and reserves. FHA and VA loan programs underwritten through automated systems can also reach 50%+ with strong compensating factors, though lender overlays may impose stricter limits. For jumbo and non-conforming loans, the maximum accepted debt-to-income ratio is typically 43%–45%, with some lenders allowing up to 50% for borrowers with substantial liquid assets; no single universal maximum applies since jumbo loans are lender-specific and not subject to GSE guidelines. If your DTI is higher than the applicable threshold you will most likely be denied mortgage financing.
The CFPB’s current ATR/QM framework (mandatory since October 1, 2022) replaced the old 43% DTI hard cap under the General QM rule with a price-based (rate-spread) threshold. Lenders must still consider and verify DTI or residual income, but there is no longer a hard 43% DTI ceiling for General QM status.
To improve your DTI, pay down any debt you may have on student loans, car payments, or credit card debt before applying for a home loan. To calculate your debt-to-income ratio, add up all of your monthly debt payments — such as student loan or car payments — and divide that number by your gross monthly income. For example, if your total monthly debts are $2,000 and your gross monthly income is $6,000, your DTI is 33%. Before paying down debt to qualify, it is vital you coordinate with an experienced Loan Officer who can review your situation and advise on what steps to take.
Most borrowers don’t realize that an automated system — not a human — makes the initial approval decision on most conventional loans. Fannie Mae’s Desktop Underwriter (DU) and Freddie Mac’s Loan Product Advisor (LPA) are the two primary automated underwriting systems used by conventional lenders. Here is what you need to know:
Understanding how these systems work helps you see why lenders are so focused on keeping your financial profile stable from application through closing.
Make sure you are up to date with your income taxes. Home loan lenders typically look for one to two years of personal tax returns, business tax returns if you own your own business, or W-2s or 1099s. Your income taxes will help determine how much you can afford now and through the life of the loan, so not staying up to date with your income taxes can be detrimental to your loan eligibility. If you haven’t filed tax returns this can cause major issues during the income validation process even if you are initially pre-approved for a loan. If you haven’t filed, make sure you communicate this early in the pre-approval process so issues don’t arise after you have a property under contract with earnest money deposited.
Lenders now routinely submit IRS Form 4506-C to request tax transcripts directly from the IRS to verify your filings. This is a common surprise for borrowers who assumed their stated income would not be cross-checked — it will be.
Sometimes getting denied a mortgage is out of your control. If the home that you are interested in purchasing is appraised at a price that is lower than the selling price or the amount that you are asking to borrow, the lender doesn’t see the home value as sufficient to support the amount that is being borrowed and will most likely deny your application. Options in this situation include:
Mortgage Lenders will base the down payment percentage on the lower of the sales price or appraised value. In competitive markets, some buyers choose to waive the appraisal contingency to make their offer more attractive — but this means you are on the hook for the gap between the appraised value and the purchase price if the appraisal comes in low, so weigh that risk carefully.
It is frustrating to have your request for a loan denied. Fortunately, understanding these common reasons can help you avoid this deflating experience, or there are steps you can take after being denied a mortgage. Think about all of these possible scenarios when you apply for a home loan. And rely on the expertise of your trusted home mortgage professionals at Sammamish Mortgage.
Under the Equal Credit Opportunity Act (ECOA), lenders are legally required to provide you with a written Adverse Action Notice stating the specific reason(s) for the denial. You also have the right to request a free copy of your appraisal within 60 days of the denial if the appraisal was a factor.
If you have any questions or think you may be ready for a place of your own, check out our homebuyer guide and contact us today! We have been part of the mortgage industry since 1992 and currently lend in all of Washington, Oregon, Idaho, and Colorado and offer a wide variety of mortgage programs and tools with flexible qualification criteria.
If you have already received a denial, here is a practical action plan:
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
A low credit score is one of the most common reasons lenders deny mortgage applications. Lenders use your credit score to assess repayment risk, and if your score falls below the minimum threshold for the loan program you are applying for, your application will likely be declined. Checking all three credit bureaus before you apply and addressing any errors or negative items can significantly improve your chances of approval.
Minimum credit score requirements vary by loan type. FHA loans typically require a 580+ score for 3.5% down (500–579 with 10% down). Conventional loans backed by Fannie Mae or Freddie Mac generally require a 620 minimum, with 740+ needed for the best rates. VA loans have no official minimum but most lenders require 580–620. USDA loans typically require 640+ for automated underwriting. Jumbo loans generally require 700–720 or higher depending on the lender.
Yes. A pre-approval is not a guarantee of final loan approval. Changes to your financial profile between pre-approval and closing — such as taking on new debt, changing jobs, making large unexplained deposits, or a low home appraisal — can result in a denial even after you have received a pre-approval letter. It is important to keep your finances stable throughout the entire process.
For conventional loans run through Fannie Mae’s Desktop Underwriter (DU), DTI can reach up to 50% with strong compensating factors. Manually underwritten conventional loans are generally capped at 36%–45%. FHA and VA loans processed through automated underwriting can also reach 50%+ with compensating factors. Jumbo loans typically cap DTI at 43%–45%, though some lenders allow higher for well-qualified borrowers. Lender overlays may impose stricter limits regardless of program guidelines.
First, request the Adverse Action Notice — lenders are legally required to provide the specific reason(s) for the denial. Review your credit reports for errors and dispute any inaccuracies. Work with a loan officer to build a 3–6 month plan to address the denial reason. Consider whether a different loan program (such as FHA instead of conventional) might be a better fit. There is no mandatory waiting period for most denial reasons, so once you have resolved the underlying issue you can reapply.
If the appraisal comes in below the purchase price, the lender will base the loan on the lower appraised value, which can result in a denial if the gap is too large. Your options include negotiating a price reduction with the seller, increasing your down payment to cover the gap, requesting a Reconsideration of Value (ROV) through your lender if you have evidence of comparable sales, or walking away if you have an appraisal contingency in your contract.
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