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Summary: There are a few different reasons why mortgage applicants may be denied a home loan, and debt load is one of them. In this article, we’ll go over how debt is one of the more common reasons for mortgage denial in Washington and nationwide.
A recent report showed that having too much debt is one of the most common reasons for mortgage denial in Washington State and elsewhere across the United States. With too much debt on a person’s plate, it can be difficult to have enough money leftover to manage paying mortgage payments in full and on time every month.
Property information and analytics company CoreLogic published an in-depth report on mortgage denial rates. They used data obtained through the Home Mortgage Disclosure Act (HMDA) to measure denial rates and also identified the most common reasons for mortgage denial in the current economy.
One of the more positive trends identified by this study had to do with overall denial rates. As it turns out, mortgage loan denial rates “have steadily declined” over the past few years. Nationwide, the rate is actually lower today than in 2004 (during the last housing boom). This means that a higher percentage of borrowers are getting approved for loans these days.
But what about those who do get turned down for mortgage loans across Washington and nationwide? What are the most common reasons for denial these days? According to this study, the debt-to-income ratio was the most commonly reported issue that caused problems for borrowers.
Definition: A debt-to-income (DTI) ratio is a numerical comparison between the amount of money a person earns (gross income) and the amount spent on recurring monthly debts. For instance, a person who uses 40% of his or her income to cover the monthly payments on credit cards, auto loan and mortgage has a debt-to-income ratio of 40%.
While mortgage lenders look at a variety of factors when reviewing loan applications, the DTI ratio is one of the most important. And, as it turns out, it leads to mortgage denials more than any other single factor.
According to the CoreLogic report, high debt-to-income ratio (DTI) was the culprit behind nearly 37% of denied home-purchase applications.
The second and third most common reasons for mortgage denial is credit history and collateral, respectively.
There’s some good news on this front, from a borrower’s perspective. Over the last few years, both Fannie Mae and Freddie Mac have increased the maximum allowable debt-to-income ratio for the loans they purchase.
Both of these government-sponsored enterprises (GSEs) have raised their limits from 45% to 50%. That means home buyers today can qualify for a “standard” conventional mortgage loan with a DTI ratio as high as 50%, a higher cap than in the past.
Sammamish Mortgage is a local, family-owned company that has been serving borrowers in Washington, Oregon, Colorado, and Idaho since 1992. Our mortgage financing professionals can work with you to help you determine which one of our mortgage programs is right for you. Please contact us if you have mortgage-related questions, or if you’d like to receive a rate quote.
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