Signs Your Mortgage Will Be Denied In Underwriting

It is the notification no homebuyer wants to receive. You found the perfect home, signed the contract, and started packing. Then, you get the call: “mortgage loan denied in underwriting.”

Panic sets in. You might wonder if you will lose your deposit or the house itself. If you are reading this, you might be worried about the status of your loan. That is normal. Understanding the signs your mortgage will be denied helps you spot trouble before it becomes a crisis.

At ID Mortgage Broker, we review files daily. We know that a denial is not always the end of the road. This guide explains the specific signs your mortgage will be denied in underwriting, how likely it is, and precisely what we can do to fix it.

Quick Links:

• Mortgage Underwriting Basics + Reasons Loans Get Denied
• Mortgage Underwriting Red Flags
• Chances Of Getting Denied After Pre-Approval And In Underwriting
• Mortgage Loan Denied At Closing And After Closing Disclosure
• FHA, VA, And Other Loans Denied In Underwriting
• California Homebuyers And Self-Employed Mortgage Denial Risks
• What Happens If You Are Denied A Mortgage Loan
• Steps To Lower Your Risk Before You Are Clear To Close
• Catch Signs Early And Protect Your Mortgage Approval
• FAQs

Mortgage Underwriting Basics + Reasons Loans Get Denied

To spot problems, you first need to know what an underwriter actually does. Their job is risk assessment. They verify that you can repay the loan and that the property is worth the purchase price.

Real estate uses many terms for “approval,” but they mean different things.

• Pre-qualification: A quick look at your unverified numbers. It holds very little weight.
• Pre-approval: A loan officer reviewed your documents and credit. This is strong, but not final.
• Full Underwriting: An underwriter reviews every line item, bank statement, and tax return to issue a final decision.
• Clear to Close: The underwriter has signed off on everything. You are ready to sign.

So, why would an underwriter deny a loan? It usually comes down to the “Three C’s”: Capacity (income/debt), Credit (history), and Collateral (home value).

Common reasons underwriters reject mortgages include:

• Weak or limited credit history that doesn’t meet program rules.
• Debt-to-income (DTI) is too high.
• The loan-to-value (LTV) is too high because the appraisal came in lower than expected.
• Inconsistent income that the underwriter cannot verify.
• Missing pages from bank statements or tax returns.

You might ask, “Should I be worried about underwriting?” Suppose you were honest on your application, and your financial situation hasn’t changed. In that case, you likely have nothing to worry about; a clean file and fast communication can cure most mortgage underwriting red flags.

However, stricter rules apply to conventional loans in California compared to other programs. Knowing which bucket you fall into helps us prepare your file correctly.

Mortgage Underwriting Red Flags

Underwriters look at the big picture. One small overdraft fee might not kill a deal, but a pattern of financial instability will. Detecting these signs that your mortgage will be denied early gives us time to pivot to a different lender or loan program.

Here are the specific red flags we watch for.

1. Debt-To-Income (DTI) Too High After Pre-Approval

Your debt-to-income (DTI) ratio compares your monthly debt payments to your gross monthly income. Lenders have strict caps, often around 43% to 50%.

If your DTI was tight at pre-approval, even a small change can trigger a denial. We often see borrowers buy furniture on credit before the loan closes. That new $200 monthly payment might push your DTI over the limit. This leads to being denied after preapproval but before closing.

Significant financial changes can move your file from an easy “approved” status to a more difficult manual review. If you are worried about your ratio, read our guide on how to lower your debt-to-income ratio.

2. Loan-To-Value (LTV) Too High Or Low Appraisal

LTV measures how much you are borrowing relative to the home’s value. If you put 20% down, your LTV is 80%.

Problems arise when the appraisal comes in lower than the purchase price. If you agreed to pay $800,000 but the appraiser says the home is worth $750,000, your LTV just jumped. If the program caps LTV at 80%, and you are now at 85%, the software will flag this as loan-to-value (LTV) too high.

This is a very common mortgage underwriting red flag in hot markets where bidding wars drive prices up faster than data can support. You may need to cover the gap with cash or switch to a different loan program.

3. Large Unexplained Deposits Or Undisclosed Debt On Credit Report

Underwriters must verify the source of your funds to prevent money laundering or undisclosed loans.

If an underwriter sees a $5,000 deposit on your bank statement that does not match your payroll, they will pause. If you cannot prove it is a gift or a sale of assets, they cannot use that money. Worse, they might count it as a new loan payment.

Undisclosed debt on a credit report is another major issue. Sometimes a credit report update reveals a hidden credit card or child support payment you forgot to list. This changes your DTI instantly. These are frequent reasons underwriters reject mortgages.

To stay safe, review the documents needed to buy a house and keep your paper trail perfect.

4. Income Changes And Self-Employed Borrower Mortgage Denial Risks

Stability is key. If you switch from a salaried job to a commission-based role during the loan process, the underwriter may view your income as unstable.

Self-employed borrowers face higher scrutiny. A common reason for mortgage denials for self-employed borrowers is “declining income.” If you made $100,000 in 2023 but only $60,000 in 2024, the underwriter will use the lower number. Aggressive tax write-offs can also lower your qualifying income too much.

If your tax returns don’t show enough income, let’s look at no-document mortgage loans that use bank statements instead.

5. Manual Underwriting And Tougher Credit Files

Most loans go through an automated system. If your file is messy—perhaps due to recent late payments or a thin credit file—the system may refer it to manual underwriting.

Manual underwriting means a human scrutinizes every detail. They are stricter on DTI and reserves. In this environment, minor issues become big reasons underwriters reject mortgages. If you know your file is borderline, we need to document everything up front.

6. Investor Loan And DSCR Loan Denied For Rental Properties

Investors often use DSCR (Debt Service Coverage Ratio) loans. These rely on the property’s rental income rather than your personal tax returns.

An investor loan/DSCR loan denial usually occurs when the market rent appraisal comes in lower than expected. If the rent does not cover the mortgage payment (a ratio below 1.0), the lender may reject the file. Review our DSCR loans for California investors to understand the specific reserve and ratio requirements.

Chances Of Getting Denied After Pre-Approval

You may want to know the odds. What are the chances of getting denied after pre-approval? According to data from the Consumer Financial Protection Bureau (CFPB) and HMDA, overall denial rates for mortgage applications hover around 9% to 15%, depending on the year and economic climate.

However, that number includes people who just applied unthinkingly. For a loan submitted to underwriting, the likelihood of getting denied drops significantly if the file is pre-approved correctly first. If a skilled loan officer reviewed your documents, the denial rate is likely under 5%.

So, how often does an underwriter deny a loan at the final stage? It is rare, but it happens. It usually stems from a change in the borrower’s profile (such as losing a job) or a property issue (such as a bad inspection).

How often do mortgages get denied in underwriting when the borrower tries to hide information? Transparency is your best defense.

Mortgage Loan Denied At Closing And After Closing Disclosure

This is the most stressful scenario. A mortgage denied at closing means you were days or hours away from getting the keys.

You receive a Closing Disclosure (CD) three days before signing. This document confirms your final terms. However, receiving a CD does not mean the lender stops checking. Lenders often do a final “soft pull” on your credit or call your employer on the day of funding.

If you quit your job or bought a car the day before, you could face a denied after-closing-disclosure situation. A loan denied after clear to close is almost always due to a change in financial status or a failure to meet specific clear-to-close conditions.

FHA, VA, And Other Loans Denied In Underwriting

Different loans have different failure points.

FHA Loans

Homeowners often ask how often FHA loans are denied in underwriting. The rate is slightly higher than that of conventional loans because FHA borrowers typically have lower credit scores. Common FHA underwriting red flags include peeling paint (a safety hazard) and unpaid student loans that affect DTI.

If you are worried about how often FHA loans fall through, know that FHA appraisal standards are strict about property condition. Learn more about the FHA mortgage in California.

VA Loans

For veterans, a VA loan denied in underwriting is less common because the VA wants to help you buy. However, the residual income requirement (money left over for living expenses) is a strict pass/fail test.

The percentage of VA loans denied in underwriting is generally lower than that for FHA loans. See our guide on VA home loans in California.

California Homebuyers And Self-Employed Mortgage Denial Risks

California presents a unique challenge. High home prices mean larger loan amounts. Larger loans mean stricter guidelines. In many parts of the state, a “standard” home price requires a Jumbo loan, which has higher credit score requirements.

Additionally, many California buyers are freelancers or tech workers with restricted stock units (RSUs). This variable income raises red flags in mortgage underwriting.

We frequently see self-employed borrower mortgage denial cases where a big bank didn’t understand how to calculate RSU income. A local broker can solve this by navigating to the right lender. If you are new to this market, check our guide for the first-time home buyer in California.

What Happens If You Are Denied A Mortgage Loan

If the underwriter denies loan approval, you will receive a “Statement of Adverse Action.” This legal document tells you exactly why. It might say “DTI excessive” or “Insufficient collateral.”

This letter is your roadmap. If the issue is credit, you can fix it. If the problem is the property, you can find a new house.

But what happens if you don’t get approved for a mortgage while under contract? You likely have a loan contingency. This clause lets you walk away and get your deposit back if financing fails.

However, if you waived your contingency to win a bidding war, the question “Will I lose my deposit if I am denied a mortgage?” becomes serious.

Without a contingency, the seller might keep your earnest money/good-faith deposit. This is why we urge clients never to waive contingencies unless their loan is fully underwritten first.

If credit issues caused the denial, read about buying a house after bankruptcy to see your timeline for trying again.

Steps To Lower Your Risk Before You Are Clear To Close

You can actively prevent signs that your mortgage will be denied in underwriting. Follow this checklist until the loan funds are received:

1. Freeze your credit: Do not open new credit cards, buy cars, or co-sign a loan for anyone.
2. Stabilize your cash: Avoid large unexplained deposits. If you must move money, document it.
3. Keep your job: Do not quit or change your pay (e.g., from salary to commission) without asking us.
4. Respond quickly: Meet all clear-to-close conditions immediately. Delaying documents makes underwriters nervous.

Catch Signs Early And Protect Your Mortgage Approval

Hearing “mortgage loan denied in underwriting” is a significant setback, but it is rarely a permanent stop. Most of the signs your mortgage will be denied are visible early in the process. We spot them, address them, and structure your file so it passes.

If you have been denied or if you are worried about a tricky income situation, let us look. We can analyze your DTI, review your credit, and compare options across Conventional, FHA, and Non-QM lenders.

Learn more about how a mortgage broker can help you qualify when big banks say no.

FAQs

Do lenders verify employment before closing?

Yes. Lenders almost always perform a final Verification of Employment (VOE) within 10 days of closing, sometimes on the very day of funding.

Can you be denied a mortgage after being pre-approved?

Yes. You can be denied after pre-approval if your financial situation changes (such as new debt or a job loss) or if the property appraisal reveals major issues. A denied loan after pre-approval is frustrating, but avoidable with good preparation.

How often does an underwriter deny a loan?

While general application denial rates can be over 10%, a fully pre-approved file submitted to underwriting typically has a much lower denial rate, typically under 5%.

Will I lose my deposit if I am denied a mortgage?

If you have a loan contingency in your contract, you usually get your earnest money/good-faith deposit back. If you waive that contingency, you risk losing the deposit.

What happens if my mortgage is denied after the closing disclosure?

Being denied after the closing disclosure is rare. It usually happens because a last-minute credit check reveals new debt, or a final check shows job loss. This results in a denial after a clear-to-close status, stopping funding immediately.