How Often Do FHA Loans Get Rejected in the Underwriting Stage?

Reader question: “I was planning to use an FHA loan to buy a house later this year, but I’ve heard they get denied in underwriting a lot. Are there any statistics that show exactly how often FHA loans get rejected during the underwriting process?”

Due to consumer privacy laws, there aren’t any specific numbers that show how many borrowers get denied or rejected during the mortgage underwriting process.

But there are some reports that show FHA loans have a slightly lower “closing rate” when compared to conventional mortgages. This could indicate that FHA loans get rejected in underwriting more often than conventional or “regular” mortgage products.

How Often Do FHA Loans Get Denied in Underwriting?

Unfortunately, there are no statistics that show exactly how often FHA loans get denied or rejected during the underwriting process. But we were able to find some reports that show FHA loans have a slightly lower closing rate than conventional mortgages.

To determine this, we used the “Origination Insight Reports” provided by ICE Mortgage Technology. This company provides software-related products and services to the mortgage industry. They also publish reports that offer insight into various mortgage lending trends and statistics.

When researching this question, we referred to their most recent insight report published in June 2021. It showed that FHA-insured home loans had a slightly lower closing rate than both conventional and VA mortgages.

In this context, the “closing rate” refers to the percentage of loans that successfully closed within 90 days of application.

  • During the month that report was produced, FHA loans had a closing rate of 71.7%.
  • Conventional (non-government-insured) home loans had a closing rate of 76.2%.
  • VA loans (used by military members) fell in the middle with a closing rate of 73.8%.

Again, these statistics do not show how often FHA loans get denied or rejected during the underwriting stage. But they do show that fewer FHA borrowers successfully closed on their loans within a 90-day period. Borrowers who use conventional mortgage products had a higher closing rate.

Common Reasons for Getting ‘Rejected’

In a separate article, we explained some of the common reasons why an FHA loan might get rejected by a mortgage underwriter. It’s the underwriter’s job to review the borrower, the property, and other aspects of the loan to make sure it meets all appropriate guidelines. Most of those guidelines come from HUD.

FHA loans can get rejected in the underwriting stage for various reasons. It might be that the borrower’s credit score is too low, the debt-to-income ratio is too high, or the property fails to meet minimum requirements. Those are just a few of the reasons why an FHA loan might be rejected in the underwriting stage.

But again, it’s hard to say exactly how often it occurs.

The Benefits of Getting Pre-Approved

Mortgage pre-approval can be a beneficial process for home buyers and borrowers. This is true regardless of the type of home loan being used.

During pre-approval, the mortgage lender will review your financial situation to determine if you are a good candidate for financing. They can also pre-approve you for a specific loan amount, which is helpful for house-hunting purposes.

Pre-approval is basically a kind of prescreening process. It can help you determine if you have any issues that might result in your FHA loan getting rejected later on, during underwriting. For instance, the pre-approval process might determine that your current debt level is too high. You could then work on correcting the problem and reapply at a later date.

But it’s important to remember that an FHA loan could still be rejected in underwriting, even if you’ve been pre-approved already. While it doesn’t happen often, this is a realistic scenario that can affect some borrowers.

The most common reason for this is when the borrower’s financial situation changes significantly between pre-approval and closing. In such cases, the mortgage underwriter might require additional documents or reject the loan altogether.

Fortunately, most borrowers who apply and get pre-approved for an FHA loan end up closing successfully. We know that by looking at the 71.7% “closing rate” statistic mentioned earlier.

Disclaimer: This article addresses the question, How often are FHA loans denied in underwriting? Every lending scenario is different because every borrower is different. As a result, portions of this article might not apply to your particular situation. The best way to find out if you qualify for the FHA program is to speak with a HUD-approved mortgage lender.