Mortgage Denied? Here's How to Strengthen Your Approval Odds

A mortgage denial stings, especially when you feel you’ve found a good home. You’ve done the math, taken the proper steps and started picturing yourself with keys in hand—only to hit a wall. But a denial doesn’t mean your homeownership goals are out of reach. It just means you need to take a few steps to strengthen your application.

The good news? You could still secure a mortgage later by understanding why and taking action to improve the situation. 

Reasons for your mortgage application denial

There are several common reasons why a mortgage application may be denied. Understanding these reasons can help you prepare for your next mortgage application. Mortgage lenders evaluate several key factors during the mortgage approval process, and falling short in any of these areas can lead to an application denial:

• Changes since preapproval: Even if you were preapproved, your financial situation might have changed between preapproval and final application. New debt, job changes or drops in credit score can lead to denial even after initial approval. Lenders verify all information again during final underwriting.
• High loan-to-value (LTV) ratio: Your LTV ratio compares how much you want to borrow to the home’s value. Loans with LTVs above 80% often require private mortgage insurance (PMI). If you can't qualify for or afford PMI, the loan may be denied.
• High debt-to-income (DTI) ratio: Your DTI ratio shows how much of your monthly income goes toward debt payments. If too much of your paycheck is already tied up in car loans, credit cards or student loans, you're considered a high-risk borrower who is likely unable to make on-time mortgage payments. Lenders have the opportunity to have different thresholds. 
• Low credit score: Your credit score tells lenders how reliably you’ve managed debt in the past and gives them a sense of your overall creditworthiness. A low score or history of missed payments signals financial instability to lenders. While some loan programs accept lower scores, a poor credit history can still lead to denial.
• Income is too low or inconsistent: Lenders need to see that you earn enough to cover your mortgage payment. If your income is too low for the loan amount you're requesting or varies significantly each month, this can be a red flag for lenders to determine your ability to make payment.
• Insufficient down payment: A small down payment increases the loan amount you need and the lender’s risk. Some loan programs require specific minimum down payments. Falling short of these requirements could result in denial.

Steps to take when you’ve been denied a mortgage loan

Getting denied doesn’t mean you’re stuck. There are several ways to improve your situation and increase your chances of approval next time. First, understand why your application was denied and focus on the improvements that will have the greatest impact on your situation. 

• Review your credit report: Start by getting a free copy of your credit report from all 3 major credit bureaus. Look for any errors or outdated information that might be hurting your credit score. Mistakes like incorrect late payments can drag down your score unfairly. If you find errors, dispute them right away.
• Review and improve your credit: Once you’ve cleaned up any errors, focus on building your credit. Pay down the existing debt and make sure all your payments are on time. Even small improvements to your credit score can open better loan options and interest rates. Avoid opening new credit accounts or taking on new credit before reapplying. This can negatively affect your approval odds or interest rate. Bloom + (FN)^{Footnote 1} may help you improve your credit score by reporting recurrent payments you're already making like rent, utilities and phone bills.
• Build up your savings: Start setting aside money for a larger down payment. A bigger down payment reduces your loan amount and shows lenders you’re financially stable. It can also help you avoid private mortgage insurance, which reduces your monthly payment. Remember to save for closing costs in addition to your down payment—these are required to finalize your home loan.
• Pay down existing debt: Focus on reducing your DTI ratio by paying off credit cards, car loans or other monthly obligations. Even eliminating one monthly payment could improve your ratio.
• Establish a stable income source: Focus on stabilizing your income through full-time employment. Be sure to assess your income stability over the last 2 years and for future income to ensure you're ready for the next mortgage application.
• Seek professional advice: Credit counseling agencies can assist you in evaluating your financial situation and identifying practical solutions for managing debt and credit challenges. They can help you understand which areas need the most work and suggest strategies you might not have considered. Consider reaching out to a nonprofit credit counselor through the National Foundation for Credit Counseling.
• Consider a different loan type: Look into other loan programs that might fit your situation better. VA loans, FHA loans and USDA loans all have different requirements. What didn’t work for a conventional loan might work with a government-backed program.
• Reapply when ready: Don’t rush back into another application. Take time to address the issues that led to your denial first. When you reapply, make sure your finances are in better shape, your financial profile is improved and your monthly mortgage payment will be affordable. A well-prepared second application can have a better chance of success.

Exploring alternative mortgage application options

If traditional mortgage approval seems out of reach right now, don’t give up on homeownership. There are several alternative paths that might work better for your current situation. Each option has its own benefits and considerations, so think carefully about which approach makes sense for you.

Explore co-signer options

Having a co-signer with strong credit and a stable income could be an option. Your co-signer agrees to take responsibility for the loan if you can’t make payments, which may reduce the lender’s risk. This could be a parent, spouse or close family member who’s willing to help you achieve homeownership. Just remember that your co-signer is equally responsible for the debt. Find out from your lender if your loan product allows for a co-signer.

Rent-to-own agreements

Rent-to-own deals let you move into a home now while working toward ownership later. Part of your monthly rent could go toward building equity when it meets the lender’s requirements. You may be able to negotiate with your landlord for the option to purchase the home at predetermined price after a set period. This can be helpful if you need time to improve your credit or save for a down payment. But make sure you understand all the terms before signing—these agreements can vary widely.

Seller financing

In seller financing, the property owner acts as your lender instead of you getting a traditional mortgage. You make monthly payments directly to the seller who holds the mortgage on the property. This can work well if the seller owns the home outright and is motivated to sell quickly. However, be aware that seller financing often comes with higher interest rates and shorter repayment terms. You’ll also want to have a real estate attorney review any agreement.

Be sure to document the purchase transaction, the financial agreements and your payment history for your next mortgage application with a lender. 

Your homeownership journey isn’t over

A mortgage denial isn’t the end of your homeownership journey. By understanding why your application was denied and addressing those specific issues, you’re setting yourself up for success when you apply for a mortgage again.

At Navy Federal Credit Union, we’re here to help homebuyers navigate every step of the buying process. From understanding your loan options to preparing a strong application, we have the resources to help you make the best mortgage decision for your situation.