Can the mortgage underwriter reject my loan application?

The 2024 FHA Loan Handbook

Reader question: “My loan officer said that my application file has gone to the underwriter. I’m just wondering how much I have to worry about at this point. Can the mortgage underwriter reject my loan application at this stage of the process? Or is an application typically ‘home free’ once it has been passed along in this way?”

Yes, your loan can be rejected during the underwriting stage. But it’s more accurate to say that the underwriter can cause your mortgage to be rejected. He or she probably won’t make the final decision to reject the loan. Instead, the underwriter will usually pass recommendations along to the bank or mortgage company. The lender will then act on those recommendations. You will learn all of this from your loan officer, who serves as your primary point of contact.

This can be one of the most confusing parts of the process for home buyers. That’s because it’s not widely publicized. The underwriter acts “behind closed doors” and doesn’t usually have direct contact with the borrower. So what they do, and how they do it, is something of a mystery to the average borrower. Here’s what you need to know about it.

What Happens During Underwriting

It’s the mortgage underwriter’s responsibility to determine that the loan in question is an acceptable risk for the lender, based on a wide variety of screening criteria.

The underwriter will look at your credit report to see how you have borrowed and repaid money in the past. He will make sure the loan file contains all of the necessary documents, requesting additional documents when necessary. He will review your debt and income to ensure they fall within the lender’s guidelines, and also any underlying guidelines such as those used for FHA or VA loans.

After the initial underwriting process, the underwriter will do one of three things:

  • If no problems are found, he or she will mark your loan as “clear to close.” This means you can proceed to closing.
  • If minor, resolvable problems are found, he/she will give a conditional approval. You must then resolve any conditions that are holding up the loan. For instance, he might ask for a letter of explanation (LOE) relating to a bank-account withdrawal, or additional documentation regarding your employment or income. These are common conditions. Learn more about letters.
  • If major, unresolvable problems are found during underwriting, the underwriter will reject the loan application (or pass along his recommendation that it should be rejected, with the specific reasons why).

Mortgage underwriters often use automated underwriting systems when reviewing loans. These computerized programs can expedite the screening process. The underwriter enters information into the program, and the program produces a computerized loan-underwriting decision.

In many cases, the computerized decision is enough to approve the loan. In other cases, additional human screening is performed. Freddie Mac’s “Loan Prospector” and Fannie Mae’s “Desktop Underwriter” are the two most commonly used automated underwriting systems in use today.

Yes, the Underwriter Can Reject Your Loan

But getting back to your question: Can the mortgage underwriter reject your loan application? The answer is yes. He or she can make a negative decision regarding your file, and that decision can cause your loan to be rejected.

First-time home buyers / borrowers often ask if they can be turned down for a loan, after they’ve been pre-approved by the lender. Here again, the answer is yes – and it has to do with underwriting. Pre-approval happens on the front end of the process, before the file reaches the underwriter. And there’s a lot that can go wrong during the underwriting process (the borrower’s credit score is too low, debt ratios are too high, the borrower lacks cash reserves, etc.). Your loan isn’t fully approved until the underwriter says it is “clear to close.”

Read: Does pre-approval mean I’ll get the loan?

Disclaimer: This article answers the question, Can the lender’s underwriter reject my loan for some reason? The lending process is highly individualized. It can vary from one borrower to the next. Every borrower is unique, so every loan scenario is unique. Your experience may differ from the scenarios mentioned in this article. If you have specific questions about the underwriting process or how your application file will be handled, be sure to ask your mortgage broker or loan officer.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author