FHA loans, which are backed by the Federal Housing Administration, are popular with first-time homebuyers for their more flexible qualifications and lower down payment requirements. Though FHA loans are more accessible, there’s still potential for mortgage denial during the underwriting process.
Here’s a look at how often FHA loans are denied in underwriting, plus some of the leading reasons for mortgage denial — plus strategies to improve your chances of loan approval.
Key Points
• FHA loans typically have a higher denial rate than conventional loans.
• Common denial reasons include credit score issues, high debt-to-income ratio, and property appraisal challenges.
• FHA loans require a minimum 3.5% down payment for credit scores of 580 or above. Lower scores require a larger down payment.
• The median credit score for FHA loans is 673, indicating a “good” credit profile.
• Reapplying for an FHA loan is possible after addressing initial denial reasons.
Understanding FHA Loan Underwriting
When you apply for an FHA loan to finance the purchase of a home, the lender will evaluate your ability to repay the loan to decide whether to approve or deny the application. This is known as the mortgage underwriting process, which involves reviewing a borrower’s financial information, such as credit history, income, debts, and the mortgage amount.
Getting preapproved for a home loan is an initial step in the FHA loan process that can give prospective homebuyers an indication of how much they can potentially borrow with the loan. After receiving preapproval, buyers get a letter from the lender that they can include when making an offer on a home.
If an offer is accepted, buyers can apply for an FHA loan, prompting another review of a borrower’s credit, employment, income, debts, and assets by the underwriter to reach a final decision: conditionally approved, suspended, or denied. This process may take a few days or more than a week to complete.
Common FHA Loan Denial Statistics
How common is it to have a mortgage loan denied in underwriting? In short, it depends on the type of mortgage loan. Below are some key statistics to keep in mind as you prepare to apply for an FHA loan.
Denial Rates Compared to Conventional Loans
When comparing FHA vs. conventional mortgages, the latter have a lower rate of denial. In 2023, the most recent year for which full data is available, 7.9% of conventional home loan applications were denied, which is the lowest among all types of home loans.
Meanwhile, applications for FHA loans, which accounted for 17% of mortgages in 2023, had a 13.6% denial rate for applications to purchase a home in the same year. The denial rate for FHA refinance loans was 41.7% for 2023.
Trends in FHA Loan Approvals
In 2023, 86.7% of applicants were approved for FHA loans. To better understand how you compare to typical borrowers, here are some key trends on FHA loan approvals. The median credit score was 673 for borrowers taking out FHA loans in 2023. And the median loan amount was $294,000 for FHA mortgages approved in 2023.
Keep in mind that getting approved for an FHA loan depends on multiple factors, including economic conditions and individual lender practices — not just a borrower’s qualifications.
Recommended: A Guide to FHA Loans
Top Reasons FHA Loans Get Denied in Underwriting
Here are a few of the main reasons for having an FHA mortgage loan denied in underwriting.
Credit Score Issues
Lenders look at a borrower’s credit history to help determine their ability to repay debt. Having a high credit utilization, a history of late payments, or recent bankruptcies could lead to an FHA loan getting denied.
The credit score needed to buy a house varies by loan type, with FHA loans being more lenient. Borrowers with credit scores of at least 500 could qualify for an FHA loan. However, a credit score below 580 requires a 10% down payment versus a 3.5% down payment for borrowers who can hit the 580 number.
If you meet the credit score requirements for an FHA loan, it’s important to ensure you stay on top of monthly payments and avoid opening new lines of credit to maintain your credit score.
Debt-to-Income Ratio Problems
When applying for an FHA loan, lenders also consider your existing debt. Having a debt-to-income (DTI) ratio over 50% could be a problem for getting approved. Note that lenders typically prefer a DTI ratio of 43% or less when applying for home mortgage loans. To assess your DTI, add up all your monthly debts and divide by your gross monthly income; multiply the result by 100.
Lenders evaluate your DTI ratio when you apply for mortgage preapproval. But a change in your DTI could arise between then and the underwriting process if there are issues with any cosigned debt or you take on new debt.
Recommended: Why Your Debt-to-Income Ratio Matters
Property Appraisal Challenges
Unless you’re a cash buyer, an appraisal is a necessary step to determine the home’s value. So it’s important to understand how FHA appraisals work. Underwriters could deny an FHA loan application if the appraised value falls short of the purchase price. This can be remedied if the seller agrees to lower the price or the buyer can make up the difference in cash.
FHA appraisals also assess whether a home meets the minimum health and safety standards set by the U.S. Department of Housing and Urban Development (HUD). If any health and safety hazards are identified, such as a broken HVAC system or leaky roof, these could result in an FHA loan being denied unless it’s resolved before closing.
How to Improve Your Chances of FHA Loan Approval
Borrowers can plan ahead to improve their chances of getting approved for an FHA loan.
Having enough money saved for a down payment and closing costs prior to applying is key, as lenders typically ask for two or more months of bank statements. As noted above, the minimum down payment on FHA loans depends on your credit score. Borrowers with credit scores of 580 or above can put just 3.5% down, while those with credit scores between 500 and 579 need to put 10% down.
Paying off debt to improve your credit and DTI ratio is another strategy to consider, especially if your credit score is hovering near 580.
When it comes time to submit the mortgage application, taking the time to review all your information for accuracy can help reduce the likelihood of getting denied due to an error.
What to Do If Your FHA Loan Is Denied
Having your FHA loan denied in underwriting can be unwelcome news, but it’s not the end of the road for buying a home. First, you can talk to your lender to determine if there were any application errors and what other options are available. Adding a cosigner to your mortgage could help secure approval, though this would mean finding someone who agrees to be financially responsible if you are unable to make loan payments.
There are also other types of mortgage loans to consider. Homebuyers who meet income limits and are buying in areas designated as eligible by the United States Department of Agriculture could qualify for a USDA loan, a type of mortgage with no down payment requirement. Alternatively, VA loans, which are available to eligible veterans, active-duty military, reservists, and surviving spouses, have no minimum credit score or down payment requirements. (Note: SoFi does not offer USDA loans at this time, but we do offer FHA and VA loans.)
Working with the Right Lender for FHA Loans
As a first-time homebuyer, you likely have questions. For instance, “which mortgage products do you recommend?” and “should I be worried about underwriting?.” Working with the right lender for FHA loans can help answer questions and address concerns to streamline the homebuying process.
Many banks and mortgage companies offer FHA loans, and HUD maintains a database of FHA-approved lenders. Comparing offers from multiple lenders is recommended to find more favorable loan terms.
The Takeaway
How often are FHA loans denied in underwriting? In 2023, just under 14% of FHA loans were denied, which is a higher rate than conventional home loans. Some of the main reasons for FHA loan denial stem from a borrower’s credit history, their debt-to-income ratio, and the appraisal. An FHA loan can be a good solution for many borrowers, however.
SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.
FAQ
What is the current denial rate for FHA loans in underwriting?
The denial rate for FHA loans in underwriting was 13.6% in 2023. This is nearly double the denial rate for conventional mortgages for the same year.
What minimum credit score is needed to avoid FHA loan denial?
Having a credit score of 500 meets the minimum requirements and can help avoid FHA loan denial. Note that borrowers with a credit score of 580 or more can make a 3.5% down payment instead of 10%.
Can I reapply for an FHA loan after being denied?
Yes, you can reapply, but it’s important to understand the reasons for mortgage denial and address those issues before submitting a second FHA loan application.
How long should I wait to apply again after an FHA loan denial?
How long you should wait depends on your reason for FHA loan denial, as there isn’t a mandatory waiting period for reapplying. For example, it may take several months for your credit score to improve before you can then reapply.
Are certain property types more likely to cause FHA loan denials?
Certain property types, such as manufactured homes and condos, have stricter requirements, making them more likely to cause FHA loan denials.
Photo credit: iStock/Milan Markovic
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
SOHL-Q225-041