Most of the financial advice out there is focused on how you can pay off the mortgage on your home as quickly as possible, from making lump sum payments to switching to bi-weekly payments rather than monthly.
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. Meanwhile, however, debt ratio limits have actually eased over the past few years. And mortgage denials are down overall.
Good News: Mortgage Denials Have Declined Overall
In October, the 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 from 2004 to 2017. They 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 last seven years. Nationwide, the rate was actually lower in 2017 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.
Debt-to-Income Ratio One of the Most Common Issues
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.
To quote the CoreLogic report:
“According to the 2017 HMDA data, 30.3% of denied applications attributed ‘debt-to-income ratio’ as the primary reason for mortgage loan denial, up from 28.8% in 2016 and 28.2% in 2015. In fact, since 2015 it has become the number one reason that lenders have turned down purchase-mortgage applications.”
DTI Standards Are More Relaxed Today, as of 2018
There’s some good news on this front, from a borrower’s perspective. Over the last couple of 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.
Here are the key takeaways for consumers:
- Mortgage lenders use debt ratios to ensure that a borrower is not taking on too much additional debt, and that’s good for all parties involved.
- Over the last couple of years, debt-to-income ratio limits have eased. Some mortgage programs allow ratios of up to 50% these days.
- Despite this easing trend, the DTI is currently the most common reason for loan denial in Washington State and nationwide.
Have questions? Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region. Please contact us if you have mortgage-related questions.