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Ten Reasons for Loan Rejection
Applying for a mortgage in the U.S. can be fraught with pitfalls. You can easily be rejected for many reasons. Here are the top ten most common reasons for banks to reject loan applications
1
Changing Jobs Too Recently
Just switched jobs with a higher salary?
It doesn’t automatically make your loan approval easier.
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If you change from one industry to another (e.g., tech → finance), banks usually don’t count bonuses or variable income unless you’ve earned it for at least two years.
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If you change industries, the income calculation must restart, which can delay or reduce your qualified amount.
2
Change in the Nature of Income (W-2 → 1099)
If your income type changes from W-2 (employee) to 1099 (independent contractor), your loan eligibility may drop.
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Banks view 1099 income as less stable, requiring two years of tax history to verify consistent earnings.
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This often affects freelancers, consultants, or self-employed borrowers.
3
Decline in Business Revenue
If you own a company and your most recent tax year shows a loss, even if prior years were strong, your loan may be denied.
Lenders typically average the past two years of business income, but if the trend shows a sharp decline, it’s considered high-risk.
4
Gift Money (for Down Payment)
Banks have strict rules for gifted funds.
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Gifts are only accepted from direct family members (parents, siblings, spouse, or children).
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The donor must provide a signed gift letter verifying the funds are a true gift, not a loan.
5
Gift Money for Investment Properties
If the property you’re buying is for investment and the down payment comes from a relative’s gift, the bank may reject it.
Lenders find it unreasonable for someone lacking personal funds to buy an investment property — it signals high risk.
6
Property Has Illegal or Unfinished Modifications
If the property has:
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Unpermitted renovations
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Pending construction
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Safety hazards
The lender can decline the loan until these issues are resolved. The property must meet appraisal and safety standards.
7
Low Credit Score
A low FICO score is one of the most common causes of mortgage rejection.
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Most banks require 620+ for conventional loans.
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Below 600 is considered high-risk, often leading to denial or higher interest rates.
8
Negative Credit History
If you’ve had a bankruptcy, foreclosure, or major delinquency in the past four years, your mortgage application will likely be rejected.
Even after recovery, lenders require proof of financial stability before re-approval.
9
Negative Credit History
If the property appraisal comes in lower than the purchase price, the bank will base the loan amount on the lower appraised value.
If your closing funds (cash on hand) can’t cover the difference, your loan may be denied or delayed.
10
Bank Bankruptcy or Lender Closure
Sometimes, denial happens outside your control — for example, if the lender itself goes bankrupt or exits the mortgage market.
In that case, you’ll need to restart the process with another financial institution.
✅ Pro Tip: Prepare Early
Before applying for a mortgage:
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Keep your income consistent for at least 2 years
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Avoid switching jobs or income types
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Maintain a strong credit score
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Keep documentation ready (bank statements, tax returns, W-2/1099s, gift letters)
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