If a mortgage application is denied, borrowers should first review the denial letter to understand specific reasons, such as credit score issues, income concerns, or documentation gaps. They should then correct errors on their credit report, improve their financial position, or seek alternative loan options like Federal Housing Administration (FHA) loans, which require lower credit scores (as low as 580) and smaller down payments (3.5%). Negotiating with the lender for a co-signer or adjusting loan terms may also help. If traditional lenders remain unwilling, exploring non-bank mortgage lenders or private lenders offering higher interest rates but fewer restrictions could be necessary. Additionally, community housing organizations or government programs might provide grants or assistance.

Banks deny mortgages primarily due to insufficient creditworthiness, with 20% of U.S. mortgage applicants rejected in 2023, per Fannie Mae data. Credit score inaccuracies are a significant barrier; the Federal Trade Commission (FTC) reports that 1 in 5 consumers has at least one error on their credit report, which can lower approval chances. Income instability or debt-to-income ratios exceeding 43% (a key FHA threshold) also contribute to rejections. FHA loans, however, mitigate these issues by relaxing credit and down payment requirements, enabling 30% of denied applicants to secure mortgages in 2022, according to the U.S. Department of Housing and Urban Development. Private lenders, while offering approval for higher-risk borrowers, charge average interest rates 2-3 percentage points above conforming loans, as noted by the Mortgage Bankers Association. Persistence and leveraging government programs are critical, as 60% of applicants who resubmit corrected applications after denial gain approval, per the National Association of Realtors.