17 Reasons You May Be Denied a Mortgage (and What to Do About Them)

Applying for a mortgage is a major financial decision. And if you're hoping to secure a home loan but are denied, it can be devastating -- especially if you've already found a property you love.

Unfortunately, there are many potential issues that could lead to a mortgage denial. The good news is, if you know about them in advance, you may be able to avoid problems that prevent you from purchasing a home.

In particular, there are 17 potential reasons for denial you should be aware of so you can take steps to prevent them.

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Different types of mortgage lenders cater to different kinds of borrowers. For example, some lenders offer loans at very competitive rates only to well-qualified borrowers. Others, such as lenders that make FHA loans, tend to be more forgiving of imperfect financial credentials.

And some loans, such as VA or USDA loans, have other restrictions on who can apply based on military status or on the value and location of the home you're purchasing.

If you apply for a loan targeted toward borrowers who meet certain criteria that you can't fulfill, this is the surest way to get denied. To avoid this, make sure you understand the lender's qualifying requirements before you submit an application -- and shop around for a lender that works with borrowers like you.

Credit score requirements vary by lender. While you could qualify for some types of loans with a credit score as low as 500, generally lenders want to see a minimum score of around 620 to 640. Obviously, if you want the most competitive rates, you'd need an even higher score than that.

If your score is on the lower end, consider applying for a loan guaranteed by the government, as FHA, USDA, and VA loans tend to have much less stringent qualifying requirements than conventional loans (the name for loans not insured by a government agency).

You can also work on increasing your credit score. Taking steps such as paying off debts, having errors removed from your report, and asking creditors if they might be willing to remove a record of a late payment could help you increase your score.

ALSO READ: What Credit Score Do I Need for a Mortgage?

If you haven't borrowed money before, you may not have a credit history for mortgage lenders to review. If that's the case, it will be more difficult to get a loan since lenders use your credit score and report as a quick way to determine if you're a responsible borrower.

In this situation, look for a lender that does manual underwriting and that is willing to look at alternative proof of your financial responsibility. And be prepared to provide documentation showing you've paid other bills on time, such as your rent, cell phone bill, utility payments, and school tuition bills.

Lenders want to be confident you can afford to pay your mortgage. As a result, they'll compare your income to your monthly housing costs to make sure that your new payments will be well within your budget.

Lenders look at the ratio of your total housing expense (including principal and interest on your new mortgage loan, as well as insurance, taxes, and homeowners association payments) and compare that amount to your gross monthly income. This is called a "front-end debt-to-income (DTI) ratio." Ideally, it'll be below 28%.

If your front-end DTI is too high, you may need to look for a lender with looser requirements (such as one offering government-backed loans). Or you may need to borrow less to reduce your monthly housing expense.

ALSO READ: What Is Your Debt-to-Income Ratio and Why Does It Matter When Applying for a Mortgage?

On the flip side, an income that's too high could disqualify you from some loans. For example, to qualify for certain types of USDA loans, your income can't exceed a specific amount (as determined by where you live and the number of people in your household).

The good news is, with a higher income, you should hopefully have a broader choice of lenders and can look for one that won't disqualify you due to your earnings.

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Lenders like to see a consistent job history. In fact, in many cases, they'll want to see you've been in the same position at a similar salary level for two years before you apply for a home loan.

If you've changed jobs recently, this can raise a red flag that your career may not be stable and your income may not be steady.

To avoid being denied for this reason, aim to put off a career change if you're thinking about applying for a mortgage soon. If it's too late and you've already changed jobs, you'll either have to wait a bit until you can provide more stable proof of income or shop around for a mortgage lender with more lax rules.

Most lenders won't just take your word for it when it comes to your income. You'll need to provide tax returns and pay stubs. This can be a problem if you work off the books or if you own your own business and take a lot of deductions that reduce your taxable income.

To make sure you don't deal with a denial on the basis of insufficient proof of income, keep careful records and be sure you're declaring all your earnings to the IRS. This is a good financial move anyway to avoid getting in tax trouble down the line.

Lenders don't just care about your income -- they also want to know how much debt you already have. After all, if you make a lot but you also owe a fortune, you aren't exactly financially stable.

Lenders assess your total monthly debt payments (including your new mortgage and other housing costs plus all your other debts). They compare that with your gross monthly income. This is called your back-end debt-to-income ratio.

Ideally, your back end DTI ratio will be below 36%. However, some lenders allow you to borrow with a back-end DTI of as high as 50%. If your ratio is fairly high, you'll need to go with a lender willing to accept a DTI on the higher end or will need to pay down debt first to avoid getting a mortgage denial.

When lenders check your credit, they're on the lookout for new financial obligations you've taken on. If you appear to be going on a borrowing spree, this can raise red flags that cause loan denial (or that force you to borrow at a higher mortgage rate).

Avoid borrowing a lot in the months leading up to applying for your mortgage so you don't find yourself denied due to too much recent debt. If you already took out a lot of new loans, be prepared to explain them to your lender during the underwriting process.

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Lenders ideally prefer you make a 20% down payment when you borrow to buy a home. That would mean you'd cover 20% of the home's cost in cash and they'd give you a mortgage to pay the other 80%.

Many people don't conform to this ideal and put down smaller down payments. This is possible, although you'll generally have to pay for mortgage insurance if you go this route.

However, most lenders do require at least some money down, even if you can't make the full 20%. If you don't have at least 3% to 3.5% of the home's value to make a down payment, chances are good you won't be able to get a loan until you do.

The best way to avoid this problem is simply to save up as much as you can before you try to make your purchase.

ALSO READ: Is Private Mortgage Insurance Worth Paying in 2021?

If you're stretching to buy a house that's out of your price range, chances are good you'll have a hard time coming up with a reasonable down payment and you'll end up running into trouble with your debt-to-income ratio.

To avoid setting yourself up for disappointment, set a housing budget before you start shopping and get mortgage pre-approval so you'll know exactly how much the bank is willing to lend you.

Lenders want to make sure the house is worth the amount you're paying for it. That's because it's going to serve as collateral that guarantees the loan. If it's worth less than your cost, the lender might have a hard time recouping the money they lent you to buy it if they have to foreclose.

As a result, they're going to require an appraisal as part of the borrowing process. If the home appraises too low, you'll either have to make a larger down payment to keep your loan-to-value ratio the same or will need to convince the seller to accept a lower price.

ALSO READ: How the Appraisal Process Can Derail Your Mortgage Approval

Lenders may also be unwilling to loan you money for a property that has other serious problems. For example, if the inspection shows issues with the foundation or if there are issues with the survey or title, the lender may feel that loaning you funds for the property is too great a risk.

You'll need to work with the seller to resolve these issues if they lead to loan denial. That may mean the seller has to make repairs or pay off past debt that's led to a lien being placed on the property.

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Some mortgages have stricter rules for the types of property you can buy with your borrowed funds. For example, the property may need to be under a certain value or be located in a specific geographic area.

If you're buying a second home or a very expensive home, then the qualifying requirements for a loan may also be stricter.

To make sure this doesn't lead to a denial, find out your lender's qualifying requirements for a home early in the process of looking for a property.

Many lenders have requirements for how much money you need in reserve before you'll be approved to borrow.

You typically need to show that you have the funds for the down payment and closing costs. And you may need to demonstrate that you've got a few months' worth of payments in the bank.

Saving up several months' worth of payments is a good habit anyway, as having this type of emergency fund could also protect you from foreclosure if you lose your income after purchasing a home.

If you leave information off your application, you may end up with a denial because of the missing details. Fortunately, this problem is usually easy to correct as long as you find out that the lender denied you because you failed to fill out the forms completely.

If you are buying a home with someone else, the lender will consider both of your credentials. If your co-borrower has a lot of debt or a low credit score, this could affect approval of your joint loan.

When this happens, either your co-borrower will need to work on improving financial numbers or you'll need to see if you can qualify for the home loan on your own.

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Now you know some of the common reasons for loan denial and can hopefully take steps to avoid a rejected application. By working on your credit and credentials and shopping for the right loan type, you can maximize the chances of getting a loan that works for you so you can buy the home of your dreams.

ALSO READ: 3 Surprising Reasons You May Be Denied a Mortgage