Here's why a mortgage application might be denied — and what to do next

With home prices still elevated and loan rates only starting to come down from the two-decade high they hit in October 2023, securing a mortgage can be hard. 

In 2022, 9.1% of mortgage applications were denied, according to the most recent data from the ​​Consumer Financial Protection Bureau, up from 8.3% in 2021. 

Lenders turn down mortgage applications for any number of reasons, from bad credit to a recent job change. It doesn't mean you have to throw in the towel on your dream of homeownership, though. Figuring out why you were denied and how to address the problem can improve your chances next time.

Below, CNBC Select outlines common reasons mortgage lenders turn down applicants and what to do if you've been rejected.

Lenders reject applicants for many reasons. Some are easier to rectify than others.

Bad credit or no credit

Lenders want to know that you can make regular mortgage payments and your credit history and score are the main clues they have about your ability to manage debt. They tell them how many creditors you have, how consistent you are about paying on time, and how long you've had credit, among other things. 

A credit score of 620 is considered the threshold for a conventional mortgage, though some lenders will work with borrowers with scores as low as 500.

You may also be turned down for a mortgage if you have a thin credit file or your credit history is too recent.

Insufficient income

Lenders may turn down an application if they simply decide you don't earn enough. They'll also consider your debt-to-income (DTI) ratio, which is the sumof all your monthly debts (like rent, student loans, car payments, credit card bills and alimony) divided by your monthly income before taxes.

A DTI of 35% or less will get you the best loan terms and a lower down payment, according to Rocket Mortgage, the largest mortgage lender in the US. A DTI of between 36% and 49% will usually still qualify you for a loan, according to Rocket Mortgage, "but [you] may encounter stricter requirements and less favorable terms."

A DTI of 50% or higher means at least half of your income is tied up in debt, which is considered  "potentially prohibitive" by lenders, according to Rocket Mortgage. 

Employment history

Mortgage lenders want to see a reliable source of income. Applicants are typically expected to have been at the same workplace for at least two years.

A promotion or a better-paying job in the same industry may be acceptable, especially if you were at your last job for a while. Changing fields or taking a pay cut or a lesser role can be a red flag.

Recent credit card application

Applying for a line of credit not only lowers your credit score temporarily but, if you're approved, it lowers the age of your average account. Even if your credit score is high, a newly opened card can count against you.

Getting rejected hurts, but don't be discouraged. Finding out what went wrong and fixing it is the only way to get to "yes."

Ask why you were turned down

Ask your loan officer why you were turned down. According to the Equal Credit Opportunity Act, borrowers have the right to know why they were rejected if they ask within 60 days of being turned down.

The creditor must provide a letter citing the specific reason, according to the Federal Trade Commission, "for example, 'your income was too low' or 'you haven't been employed long enough.'" They must also tell you which credit reporting agency provided the information.

The lender might also have information about alternative funding options, like an FHA, USDA or VA loan.

Shop around for another mortgage

Just because you were turned down doesn’t mean there are no other loans available to you. If you were rejected because of bad credit, Rocket Mortgage considers applications from borrowers with scores as low as 580. 

In addition to a standard 15- or 30-year mortgage, Rocket offers a customizable fixed-rate loan with a term from eight to 29 years.

CitiMortgage® also works with applicants with a 580 score and its HomeRun Mortgage program lets approved borrowers make a down payment of less than 20% without taking out private mortgage insurance. Qualifying applicants can also get $5,000 toward closing costs.

Improve your credit

If your credit score kept you from getting a mortgage, stop your home search and focus on improving your credit.

• Make on-time payments. If you can, pay the full balance of your credit cards each month. It will improve your payment history and lower your credit utilization ratio.
• Get your credit utilization ratio down to 30%. Some financial experts suggest getting your ratio below 10% if you want the best rate.
• Avoid opening new credit cards for 12 months. It temporarily dings your credit score and lowers your average account age.

If you need more help priming your credit, *Experian Boost is a free service that can improve your credit score by linking on-time payments to your wireless company and other bills not usually reported to the three credit reporting agencies. 

It only influences your score with Experian, however, and won’t help if a lender requests a credit report from Equifax or TransUnion.

If you have a thin credit file, you can work on building your credit history with a secured credit card.

Get help with the down payment

If you were turned down because your down payment was too small, Ally Bank’s HomeReady mortgage enables approved borrowers to put down as little as 3%. (There are income restrictions and applicants must have a debt-to-income ratio of less than 50%.)

You could also pause the mortgage process and focus on beefing up your savings for a bigger down payment. A high-yield savings account (HYSA) with Western Alliance Bank has one of the highest annual percentage yields on the market and only requires a $1 opening deposit. 

UFB Secure Savings also offers a HYSA with a robust annual return, and there are no monthly fees and no minimum balance requirements.

Private and governmental programs also provide grants and specialized home loans, especially for first-time buyers. 

• New York City’s HomeFirst Down Payment Assistance Program provides grants of up to $100,000 for eligible residents. 
• California’s Dream For All Shared Appreciation loan provides qualified residents who make no more than 120% of the area median income with up to $150,000 in down payment and closing costs. 
• Bank of America will give qualified first-time homebuyers in select states a down payment grant of up to $10,000 and up to $7,500 toward closing costs.

Get a co-signer

You might want to consider asking a parent or someone else with good credit and sufficient income if they would co-sign a home loan with you.

This isn't a casual request: Your co-signer should understand they would be held responsible for the debt should you miss payments or default.

There's no set answer about how long to wait after you've been turned down for a mortgage to try again. It depends on why you were rejected. The important thing is to address whatever that reason was.

No matter the cause, your credit score took a hit when the mortgage provider ran a credit check on your application. At the very least, wait a few months until that strike clears before applying again.  

Being turned down for a mortgage loan doesn't mean you'll never get your dream home. But if you are denied, it's important to figure out why and correct those issues to improve your chances the next time.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.

*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.