There are five common reasons that aspiring homeowners are unable to get a mortgage, according to a new report.
The top reasons lenders reject mortgage applications include prospective home buyers having a debt-to-income ratio that’s too high, having a low credit score or not having enough money in reserves, according to the report from the National Association of Realtors.
In its annual Profile of Home Buyers and Sellers, the industry group found that 4% of successful home buyers had a mortgage application rejected by a lender before they went on to secure a mortgage. The report is based on what the borrowers reported as the reasons they were rejected for mortgages. Lenders were not surveyed.
Home buyers are having a tough time right now, with the rate on a 30-year mortgage at a 23-year high. High mortgage rates can add hundreds of dollars to monthly housing payments, meaning buyers face steeper borrowing costs when trying to take out a mortgage.
According to the NAR report, 48% of the would-be home buyers who had been rejected had too much debt relative to their income.
“Lenders want to make sure that you are not carrying such a high debt load that you’re able to actually make the payment based on the income that you’re receiving in a month,” Jessica Lautz, deputy chief economist and vice president of research at the NAR, told MarketWatch. “So they are going to look at your overall debt and what you may owe, taking into account your credit card, your student loans and so on.”
Debt-to-income ratio refers to how much of a buyer’s income goes toward paying down all of their debts, including credit-card debt, student-loan debt, car-loan debt and any other debt. It’s calculated by dividing all of a person’s monthly debt payments by their gross monthly income.
A debt-to-income ratio of 15%, for example, means 15% of income goes toward debt payment. A debt-to-income ratio of around 35% is considered good, according to LendingTree, but mortgage lenders will approve mortgages for borrowers with debt-to-income ratios up to 45%, according to Fannie Mae, if they meet other criteria such as having a good credit score and sufficient cash reserves.
Debt also plays a role in keeping people from saving for a down payment on a house. First-time buyers say some of the biggest obstacles to saving for a house include student-loan and car-loan debt.
Among those who were rejected for a mortgage, 21% said it was because they had a low credit score. Not having enough money in reserves contributed to 16% of rejections.
Other reasons buyers get rejected by mortgage lenders
Additionally, 10% of prospective home buyers said they were not able to qualify for a mortgage because the lender could not verify their income. Unverifiable income can be an issue for gig workers, for instance, if they are not able to come up with a statement that shows how much they make on a monthly basis.
Some 8% of aspiring home buyers also said they were rejected for not having a big enough down payment. The average down payment has grown to 8% this year, up from 6% last year, the NAR report found.
Lautz noted that the data was self-reported, so these may not be the only reasons or the exact reasons a home buyer was rejected by a lender.
“Sometimes, a home buyer may not actually know why they’re being rejected,” Lautz said.
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