Why FHA Loans Are Denied

Applicants must meet qualifications for FHA mortgages.

Prospective homeowners shopping for a mortgage may consider one backed by the Federal Housing Administration, part of the U.S. Government's Department of Housing and Urban Development. These mortgages, commonly known as FHA loans, ease some mortgage requirements and allow some borrowers to purchase property with a down payment of only 3-1/2 percent of the home's purchase price.


According to the official website for the U.S. Department of Housing and Urban Development, or HUD, the Federal Housing Administration has helped back mortgages since 1934. Although government-approved lenders review borrower applications and issue the mortgages, the Federal Housing Administration, or FHA, provides insurance on the debt. Because the government insurance removes some of the risk from the mortgage process, lenders typically approve FHA mortgages for borrowers who may not qualify for other, noninsured loans.


To gain approval for an FHA mortgage, an applicant must meet certain requirements. The borrower must pay a premium for mortgage insurance, according to the FHA website, to help offset losses from unpaid debts. FHA borrowers must also meet two ratios: one that measures the amount of monthly mortgage payments versus the amount of monthly income, and one that measures the amount of total required monthly payments — including mortgage payments, car payments, credit cards and any other debts — against monthly income. FHA borrowers must also complete a loan checklist that includes basic items such as Social Security number, gross monthly salary, value of all personal property, recent check stubs and personal tax returns.


According to the mortgage website FHA Info, many people who get denied for an FHA mortgage receive that decision based on past credit performance. Recent payment history on other debts plays a major factor in an FHA credit decision, and major credit problems like judgments or collection activity within the last two years may lead to credit denial. Applicants who do not fall into FHA-approved debt-to-income ratios may also receive a denial, as the FHA requires that borrowers have a maximum mortgage payment to effective income of 29 percent and a maximum total payment to effective income ratio of 41 percent. Finally, according to FHA Info, each state imposes limits for FHA mortgage amounts, and applicants seeking large mortgages that exceed these limits may receive a denial.


To prequalify for an FHA mortgage, applicants must only demonstrate the ability to gain employment and a stable job history that includes working with the same employer for at least two years. According to FHA Info, borrowers must also have no foreclosures or bankruptcies within the last three years. Although lenders may prequalify applicants for FHA mortgages, the final approval process requires a more thorough review, and some prequalified applicants may be denied.


Although FHA mortgages allow buyers to purchase a home with a down payment of only 3-1/2 percent, the home buying website Mortgage Loan notes that mandatory insurance premiums can make FHA loans considerably more expensive than conventional alternatives. In addition, high insurance premiums can eat into the home's equity, and FHA loans may have higher interest rates than similar conventional mortgages.

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