Why Did My Home Mortgage Fall Through?

If you’ve ever had a mortgage fall through, you know how frustrating it can be. You’ve spent weeks — or even months — going through the application and approval process, only to have it all come crashing down.

So, what went wrong? Understanding the reasons behind your mortgage being denied can help you navigate your next steps.

Mortgage underwriting is the process that lenders use to determine whether or not to approve a loan. It’s a complex process that considers several factors, including your credit score, employment history, and income.

Let’s examine the mortgage underwriting process and why it sometimes leads to home loans falling through — and what you can do about it.

1. Home appraisal

The home appraisal is a crucial part of the mortgage underwriting process. Lenders rely on the appraisal to confirm that the home’s value matches or exceeds the amount you’re borrowing.

The appraisal process begins with a licensed appraiser completing a thorough inspection of the property. They’ll look at factors such as square footage, number of bedrooms and bathrooms, the home’s age, and the home’s condition. They’ll also compare the property to other similar homes in the area and account for any special features that may add value.

Once the appraisal is complete, the final report will be given to the lender. If the property’s appraised value is lower than the loan amount, the loan will not be approved, or they may offer a smaller loan, requiring you to come up with a larger down payment.

This is why the appraisal process is so important. Make sure the home you are purchasing is in good condition and priced fairly. And it’s essential to work with an experienced professional appraiser who understands the local real estate market.

2. Credit score

Credit scores are another important part of the mortgage process. Your credit score and credit history play a big role in determining whether lenders will offer you a mortgage and what the terms may be.

A higher credit score will grant you access to better loan terms and maybe even a lower interest rate. A lower score, on the other hand, can make getting approved for a loan much more difficult and can even mean that you’ll be charged higher interest rates or even denied for a mortgage.

It’s important to check your credit score before starting the mortgage process and take the necessary steps to improve it, if need be. Working with a credit specialist or credit counseling service can help you build a better credit score before applying for a loan.

3. Debt-to-Income ratio

Debt-to-income ratio (DTI) is another important factor for lenders to consider when evaluating your home mortgage application. This ratio is the percentage of your gross monthly income that is devoted toward paying your monthly debts.

Generally, lenders prefer to keep this ratio below 45%. That’s a healthy ratio that shows lenders that you are responsible with your money and likely to keep up with your payments.

The higher your DTI is, the less likely you will be approved for a loan. It’s important to review your DTI before you apply for a loan, as there are steps you can take to help lower it. This includes making extra payments on debt or negotiating lower rates or payments.

Ensuring that your DTI is manageable before applying for a home mortgage can go a long way in the approval process.

4. Employment history

Employment history is another significant factor for lenders to consider when evaluating your mortgage application. This shows lenders if you can hold a job, establish credit, and manage your finances over a period of time.

Generally, you should have held the same job for a minimum of two years to be eligible for a mortgage. However, having job histories that demonstrate stability — even if they’re with different employers — can also favorably influence your application with lenders. And if you have a nontraditional occupation, don’t worry — you can still be approved for a loan.

5. Bankruptcy

The final factor affecting mortgage loan eligibility is bankruptcy. Bankruptcy has a huge impact on a loan application. Most lenders require borrowers to wait a certain amount of time following bankruptcy before applying for a home loan.

If you filed for bankruptcy, the lender will look at your payment history in the past two years and any collections accounts or foreclosures that resulted from the bankruptcy. The lender will also consider your emergency fund, credit rating, and employment history prior to the bankruptcy. These factors will help the lender evaluate the risk of approving your loan.

Having a bankruptcy does not necessarily mean that you cannot get approved for a mortgage loan. It is important to be honest and upfront with your lender and provide documentation that makes you a more attractive loan applicant.

6. Foreclosure

Foreclosure is when a lender takes possession of your property because you stopped making mortgage payments. This can seriously impact your ability to qualify for a home loan.

Most mortgage lenders require borrowers to wait a minimum of three to seven years before applying for a home loan if they have experienced a foreclosure. During this time, it’s important to gradually rebuild your credit score and save for a down payment.

If you can demonstrate to the lender that you’ve maintained a stable income, saved for a down payment, and invested in improving your credit score, you will be more likely to get approved for a loan.

7. Mortgage insurance

Another reason your home mortgage might have fallen through is due to a lack of insurance. Mortgage insurance is an insurance policy that protects your lender if you cannot make your mortgage payments. Lenders usually require it if the borrower has a down payment of less than 20% of the loan amount.

Typically, mortgage insurance is paid as a percentage of the loan amount and paid monthly. It can be the key to helping you qualify for the type of loan you want. The amount of mortgage insurance required will vary based on the type of loan and the down payment amount.

8. The home inspection

Home inspections are another assessment of the property — this time with the goal of finding any issues or problems that may be at work. If the home inspection reveals repairs are needed, the buyer can ask the seller to complete these before closing on the home.

They also might ask the seller for repair credits, which would give them the cash to make the repairs on their own after move-in.

If the sellers won’t agree to either of these solutions, the buyer can either move forward (and foot the bill for repairs on their own) or terminate the house contract. Home inspections are the third-biggest reason for terminated contracts.

9. The buyer can’t sell their old house

Many homebuyers are also home sellers. When this occurs, it’s common for the buyer to include a sale contingency in their contract — meaning they want to buy the house, but only if they can sell their current property first. 

Most sellers aren’t wild about sale contingencies. They don’t want the uncertainty and the wait. If there are multiple offers on a home, it’s unlikely the seller will choose one that has a sales contingency.

10. There are problems with the home’s title

Title issues can also make a deal fall through. In some cases, there may be a lien against the property, which means the seller owes a creditor of some sort, and the debt must be cleared before the home can transfer hands. This typically happens if they failed to pay a contractor or repair person or if they have unpaid income or property taxes.

If neither the buyer nor seller is willing to pay these debts off, it usually means the sales contract will be terminated.

An additional issue is when the title search reveals another party on the deed — like a former spouse or family member. When this is the case, that party must be willing to sign the title transfer and sell the property. If they can’t be contacted or are unwilling, it could cause the deal to fall through.

The bottom line on why a mortgage falls through

The mortgage underwriting process plays a crucial role in determining the approval or rejection of a home loan. Factors such as the home appraisal process, credit score, debt-to-income ratio, employment history, bankruptcy, foreclosure, and mortgage insurance all contribute to the lender’s decision.

It’s important for borrowers to be aware of these factors and take the necessary steps to address any issues that may arise, such as improving credit scores, managing debt, maintaining stable employment, and rebuilding after bankruptcy or foreclosure.

By understanding and proactively addressing these factors, borrowers can increase their chances of successfully securing a home loan.