In 2022, 9.1 percent of home purchase applications were denied — up from 8.3 percent the year before, according to the Consumer Financial Protection Bureau. Credit issues, changes in employment status and high debt-to-income ratios are three of the most common reasons that applicants get denied.
High debt-to-income (DTI)
Before approving you for a mortgage, lenders review your monthly income in relation to your monthly debt, or your debt-to-income (DTI). A good rule of thumb: your mortgage payment should not be more than 28% of your monthly gross income. Similarly, your DTI should not be more than 36%.
The most recent report provided by the Consumer Financial Protection Bureau reveals that the overall denial rate for home purchase applications for all applicants was 8.3% in 2021, lower than that in 2020 (9.3%) and in 2019 (8.9%).
Debt-to-income ratio is high
A major reason lenders reject borrowers is the debt-to-income ratio (DTI) of the borrower. Simply, a debt-to-income ratio compares one's debt obligations to his/her gross income on a monthly basis.
Overall, 9.1% of home purchase applications among all applicants were denied in 2022, the consumer watchdog agency reported, higher than 8.3% in 2021 but a marginal decrease from 9.3% in 2020.
How often does an underwriter deny a loan? A mortgage underwriter typically denies about 1 in 10 mortgage loan applications. A mortgage loan application can be denied for many reasons, including a borrower's low credit score, recent employment change or high debt-to-income ratio.
The 'C' word
When you apply for a mortgage, the first thing your lender will do is check your credit score. Your credit score is determined by your past borrowing history and payment behaviours. The higher your score, the more likely you are to be approved for a mortgage, and the lower your interest rate will be.
It's rare — but still possible — that loan requirements can change after a pre-approval is issued. Let's say that you applied for a home loan that allows a credit score of 620, and you're good to go because you have a score of 630. But then they move the goalpost, and now you need a credit score of 640.
If the risk is deemed too high, an underwriter may refuse coverage. Risk is the underlying factor in all underwriting. In the case of a loan, the risk has to do with whether the borrower will repay the loan as agreed or will default.
Getting pre-approved for a loan only means that you meet the lender's basic requirements at a specific moment in time. Circumstances can change, and it is possible to be denied for a mortgage after pre-approval.
There are many reasons why an underwriter may deny your mortgage loan, such as a low income, an unsatisfactory credit history or a recent change in employment. If an underwriter denies your mortgage loan, try going to a smaller lender or addressing the issues that caused the denial in the first place.
You could still be eligible for a mortgage even if you were denied. But you'll need to explore other loan programs that may be a better fit for you financially. Inquire with the loan officer to learn more about alternative mortgages, such as FHA loans or USDA loans, that may be available to you.
Rejection Rates:
The average rejection rate of mortgage applications decreased by 2.5 percentage points to 12.1% in 2023, remaining above the 2019 rate of 10.2%. The average rejection rate on auto loans increased by 5.8 percentage point to 11.0% in 2023, the highest rate since the start of our series in 2013.
If your loan application is denied, the inquiry will remain, but the lender's decision will not appear on your credit reports. So, a declined loan will not appear on your credit report and won't directly impact your scores.
If there are any changes to your credit score or employment status, your loan can be denied during the final countdown. How can you protect yourself so that your loan isn't denied at the final step? First, don't quit your job or start a new one, even if it means a pay raise.
In the securities industry, underwriting risk usually arises if an underwriter overestimates demand for an underwritten issue or if market conditions change suddenly. In such cases, the underwriter may be required to hold part of the issue in its inventory or sell at a loss.
When trying to determine whether you have the means to pay off the loan, the underwriter will review your employment, income, debt and assets. They'll look at your savings, checking, 401k and IRA accounts, tax returns and other records of income, as well as your debt-to-income ratio.
Data from the past 24 months is the most important information that mortgage lenders look at. However, they could look at derogatory information, like foreclosures or bankruptcies, that happened years before.
For this reason, the interaction between a loan officer and an underwriter is limited to a simple transfer of the borrower's facts and data. A loan officer may not attempt to influence the underwriter. Loan officers and underwriters are both crucial roles in the home buying process.
Lenders want to recheck your credit score before closing to ensure you qualify for the rate approved during preapproval. As such, a decreased credit score could lead the lender to hike your loan's interest rate or change other terms.
Underwriting can take as little as a few days or as long as a few weeks. It takes place after you have an accepted contract on a home, but before closing.
An FHA mortgage is usually the easiest home loan to get. You can qualify with a credit score as low as 580 (with a 3.5% down payment) or even 500 (with a 10% down payment).
Home buyers have three levers to pull to increase their chances of a mortgage approval: income and debts, credit score, and assets. When you're strong in all three categories, you're more than likely to be approved for a mortgage.
Loan underwriters will review your bank statements to help determine whether you will be eligible for a mortgage loan. They'll look at your monthly income, monthly payments, expense history, cash reserves and reasonable withdrawals.