Why are mortgage applications declined?

Published on Jul 01, 2021

Why are mortgage applications declined?

Buying a house is often the biggest purchase a person makes in their lifetime and qualifying for a mortgage is vital to making your homebuying dreams come true. Here are some factors that may negatively impact your qualifications.

To ensure you aren’t part of the unlucky percentage that are denied, it’s important to understand the main reasons why lenders turn down applicants and take steps to correct or avoid those issues.  

High debt-to-income ratio  

According to Home Mortgage Disclosure Act data, high debt-to-income (DTI) ratios were the number one reason mortgages were denied in 2018, accounting for 37% of all denials. Basically, your DTI consists of how much of your monthly income goes toward paying off any outstanding debt. Child support and alimony are also counted as monthly debt in this equation. Lenders want to make sure you have enough of your paycheck left over after paying your monthly debt obligations since this can impact your ability to pay off a new mortgage loan.

Your DTI is determined by dividing your monthly debt by your gross monthly income. For example, if you bring in $5,000 a month (before taxes) and your monthly debt is $2,500, your DTI is 50%. Most lenders have a DTI cap of 43%, but there can be exceptions for otherwise strong loan profiles. FHA loans and VA loans may be flexible regarding your DTI score if you can make a higher down payment, have good credit, or meet certain income requirements.

Tips for improving a high debt-to-income ratio

If your DTI ratio is too high, there are a few things you can do to help lower it

Low credit score 

Low credit scores account for 34% of all denials, making this the second biggest reason applicants are turned down for mortgage loans. Credit scores range from 850 (perfect) to 300. The higher your score, the more likely you will be approved and the more favorable terms you will get. Most successful loan applicants have scores above 620, but it is possible to get an FHA-backed loan or a flexible loan program with a credit score as low as 580.

Tips for improving a low credit score

The first step in managing your credit score is understanding it. Take the time to check your scores with the three top credit reporting agencies and see where you fall on the spectrum. These credit reports will explain which factors are negatively impacting your credit score so you can take targeted steps to improve.

It’s normal to have concerns about qualifying for a mortgage, but this a great time to jump in. Mortgage rates are currently quite low, and lenders are offering more flexible plans to accommodate buyers.