Despite the $4 trillion in origination volume projected for 2020, it’s not as if everyone and their cat is getting a mortgage. Prospective homebuyers still have their applications rejected by the thousands every month, a situation made all the more challenging today, when lenders have tightened their credit standards in response to COVID-19’s disruption of the U.S. economy.
NerdWallet recently studied 460,000 denied mortgage applications for site-built single-family homes from 2019 to assess why Americans are most frequently denied funding. While the resulting report, written by NerdWallet’s Elizabeth Renter, is intended to help borrowers, its approach to demographics could help originators determine which clients may require additional effort and financial coaching to get their loans approved.
NewdWallet found that the denial rate in 2019 was largely consistent among age groups. The least denied subset, 25- to 34-year-olds, had their applications turned down at a rate of 7 percent, while borrowers under 25, 45 to 54, and 55 to 64 were denied at a rate of 9 percent. All other age groups had a denial rate of eight percent. The only cohort to have an origination rate south of 70 percent were those 75 and older.
Renter told Mortgage Professional America that older applicants were more likely to have DTI listed as a reason for denial than younger applicants, while younger applicants were more likely than the older ones to have credit history cited among their denial reasons.
“For example,” she says, “40 percent of denied applications among those aged 65 and older had DTI ratio listed among their denial reasons, compared to 34 percent among applicants under age 35. And while 20 percent of denied applications among those aged 65 and older had credit history among their denial reasons, just 24 percent of applications from those under age 35 did.”
The denial rate varied little state-by-state, ranging from five percent to ten percent. Idaho and Minnesota possessed the two lowest denial rates, while Mississippi, Florida and West Virginia had the highest.
The most frequently cited reason for denied applications was an unfavorable debt-to-income ratio, a factor in 35 percent of denials.
As Renter explains, a DTI under 20 percent is generally considered low, whereas 43 percent is typically the highest lenders will accept for qualified mortgages. Fewer than 10 percent of applications with DTIs below 50 percent were rejected last year.
“The risk of a denial increases significantly when an applicant’s DTI reaches 50 and above,” she writes. “In fact, 78 percent of applications with DTIs over 60 percent were denied in 2019.”
Credit history (22 percent) and loan-to-value ratios (18 percent) were also deciding factors, with incomplete applications, insufficient cash, and unverifiable information accounting for less than 15 percent of denials each.
Renter’s advice may not blow most seasoned mortgage pros’ minds, but it’s worth repeating for the sake of borrowers.
In addition to paying down debt or increasing income, Renter advises potential home-hunters to access debt-to-income calculators as a way of monitoring their overall debt. She says buyers should also concentrate their efforts on building a credit score of 700, the “bare minimum level for approvals announced by JP Morgan Chase this spring,” or higher. Aside from common sense tips like keeping credit balances low and paying bills on time, she encourages borrowers to also review their credit reports for errors, a not uncommon occurrence.
Renter’s third piece of guidance, saving up a larger down payment, could be asking a lot of buyers at a time when inventory is low and prices are escalating. An extra three or six months on the sidelines in a particularly active market could give prices an opportunity to swell beyond many buyers’ thresholds.
Her advice to loan officers is to continue providing their clients with frank advice.
“Giving these applicants clear feedback on how to best ensure an approval stands to serve everyone involved,” she says.