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Why Would an FHA Loan Be Denied by an Underwriter? (This is critical)

Key Takeaways

  • Underwriting is the process of determining whether or not an applicant’s finances are suitable for an FHA loan.
  • In 2020, the FHA loan denial rate was 14.1%.
  • Before qualifying for an FHA loan, prioritize improving your financial situation (credit score, income, and DTI).

After having your offer approved, facing rejection for a house loan can be distressing for any aspiring homeowner. The FHA loan is not an exception.

When confronted with such a challenge, the best way ahead is to understand what went wrong and better. This essay will assist you in doing so.

Can You Be Turned Down for an FHA Loan?

Although FHA loans are known to be more lenient and flexible when it comes to their requirements, If the borrower is deemed a worthy investment, it is still subject to lender approval.

Lenders would lose a lot of money if they gave loans to anyone who asked for them. Underwriting is used to mitigate this.

What exactly is underwriting?

Underwriting is an important part of any loan process, including FHA loans. It is the evaluation of an applicant’s financial situation that determines whether or not the loan should be granted.

The FHA underwriter’s job with this is to check the borrower’s:

  1. Income. The lender will require two years of proof of income to ensure that you have enough money to pay off your loan. Pay stubs, W-2 income statements, or tax returns can be used as evidence. You should ideally have a steady job that will last for the foreseeable future.
  2. Credit score. Your credit score reflects your previous loan and payment history. The higher your credit score, the more likely you are to be considered a low-risk borrower. Despite the fact that FHA loans are regarded for having low minimum credit score and down payment requirements, different lenders may have different criteria. Some will require a credit score of 600 to put a down payment of 3.5%, even if the FHA suggests that 580 will be the minimum credit score.
  3. Debt-to-Income ratio. Your debt-to-income ratio (DTI) shows how much debt you have in comparison to your income. Your DTI should be as low as possible. The standard FHA loan guidelines are 43%. Higher DTIs can be approved, but they must be accompanied by compensating factors.

If the underwriter determines that the borrower does not meet the eligibility requirements, the loan is denied. This is the same throughout all types of loans.

How Frequently Do FHA Loans Get Denied by Underwriters?

If you are wondering how often underwriters deny FHA loans – according to data collected under the Home Mortgage Disclosure Act, the denial rate for FHA loans in 2020 stands at 14.1%.

Will My FHA Loan Be Approved By An Underwriter?

In FHA loans, there are two points in which the borrower gets approval and moves forward in the process.

The first is the pre-approval which is done by your local FHA lender. This ensures that the lender is not wasting time and is entertaining a client who may be qualified for a loan.

The second is the actual mortgage approval which is done by the FHA underwriter. This is where the borrower’s credentials and financial situation are thoroughly examined to ensure that they are a good investment for the lender.

As previously stated, FHA loans have more flexible requirements, but rejections are still possible. The most common reasons are also related to the factors listed above that an underwriter must consider.

  1. Recent job change. Lenders prefer to lend to those who are financially stable. This can be especially difficult if you have recently changed jobs.
  2. Low credit score. The minimum credit score requirement as stated by FHA loan guidelines is 500. However, keep in mind that it is the lenders who fund the loan, so they may have different credit score requirements and may avoid those with lower scores to mitigate risks.
  3. High DTI. If your DTI is too high, lenders may believe you are unable to accept this additional debt.
  4. Low appraisal. FHA loans require an appraisal to determine how much they will lend to you. If the appraised value of the home is less than the selling price, you must pay the difference out of pocket or walk away from the loan.

What to Do If Your FHA Loan Is Rejected

The Consumer Financial Protection Bureau suggests those rejected to ask for an explanation from their lender on why their application was declined. Once you’ve determined the reason for the denial, the best next step is to improve your financial situation.

Make sure you have a stable job, work on improving your credit score by making on-time payments, and pay off your debts.

It’s also a good idea to put money aside for unexpected expenses.

You should also expect a low appraisal. In such cases, some people pay the entire difference out of pocket, meet halfway with the seller, or, in the best-case scenario, convince the seller to lower the price completely.

If you are getting an FHA 203(k) loan, your lender might also ask for additional fees.

If you believe you are already in a good financial situation, you may not have to wait long before applying for another loan.

Don’t Give Up Hope

Everyone is aware that the route to home ownership can be difficult. To ensure a smoother journey the following time, make sure you are in a decent financial position before submitting another loan application.

Stable income, great credit ratings, a low DTI, and cash on hand are all signs that you’re on the right track. You’ll have the keys to your ideal home in no time if you’re patient and dedicated.

Please do not hesitate to contact us if you want to make the home-buying process go more smoothly.


How Long Does FHA Loan Underwriting Take?

There are numerous factors that can influence how long the FHA loan underwriting process takes. The loan officer’s files may be incomplete, and/or the underwriter may be extremely busy. However, it usually takes 2-6 weeks.

Are Underwriters Able to Make Exceptions?

The simple answer is yes. However, this is only possible if you have significant compensating factors. For example, you may have a lower credit score but a very low DTI.