Mortgage application data from past years can teach important lessons. It might not be as compelling as a memoir, but the story told by the data could help aspiring homeowners make their dreams come true.
In 2020, as potential home buyers scrambled to take advantage of ultra-low mortgage rates, more than half a million mortgage applications were turned down. A review of lender data on file with the federal government paints a picture of the home buying rush and shows how refusals have particularly affected one type of loan. He also gives advice to buyers hoping to prove their own mortgage applications have been turned down.
Applications increased, but rejection and approval rates remained stable
Demand was high and mortgage rates for 30-year loans were relatively low – around 3.5% as of 2020. time and pushing the housing market into a frenzy.
In 2020, lenders processed 10% more mortgage applications than the previous year – about 6.5 million compared to 5.9 million in 2019, according to data filed under the Home Mortgage Disclosure Act, or HMDA. While the share of those applications approved, 73%, and the share denied, 8%, are the same year over year, the increase in applications resulted in approximately 58,000 more denials in 2020.
When mortgage applications are underway, lenders take steps to ensure that the flow of money to borrowers remains manageable. One way to do this is to tighten borrowing standards or make it a bit more difficult for aspiring homebuyers to get approval. For example, from May to December 2020, the average credit score among successful conventional mortgage borrowers ranged from 755 to 759. In 2019, during the same period, the average score ranged from 754 to 755, according to data from Ellie Mae, a mortgage processing company.
The debt-to-income ratio remained the top most common reason for refusals, accounting for 32% of all refusals. In fact, 21% of requests with a DTI of 50 to 60% were refused, and 85% of those with a DTI of over 60% were refused. This is higher than in 2019, when these rates were 18% and 78% respectively.
Tip to the borrower: Keep your debt low. That’s good advice for a whole host of reasons, including the cost of interest, but especially if you’re hoping to qualify for a mortgage. A debt / income calculator can determine your DTI and help you determine how to reduce it. High DTIs signal lenders that you may be struggling to meet all of your financial obligations. Try to keep it as low as possible, but less than 40% is a good place to start.
Refusals are on the rise among traditionally flexible FHA loans
Loans guaranteed by the Federal Housing Administration, or FHA loans, are generally touted as good mortgages for first-time homebuyers or people with less solid credit histories. This is because a lender’s risk is mitigated: the federal government guarantees that it will be paid, even if the borrower cannot pay.
But even FHA loans were more difficult to obtain in 2020; refusals among these types of mortgages fell from 10% in 2019 to 12%, a difference of about 25,000 refusals. Refusals of conventional mortgages, on the other hand, remained stable at 7%, according to data from the HMDA. From May to December 2020, the average FICO score of FHA borrowers ranged from 682 to 684 compared to 674 to 679 during the same period in 2019, according to data from Ellie Mae.
Credit history was the second most cited reason for refusing FHA applicants, accounting for 26% of those refusals versus 16% of conventional loan refusals.
Tip to the borrower: FHA loans remain easier to obtain for applicants with less solid credit histories, but that doesn’t mean they’re an overwhelming approval. While the qualifying standards are generally more lenient than a conventional mortgage, they can vary from year to year. Nevertheless, take steps to build your credit score, reduce your ITD by paying off your debt, and borrow only what you can afford.
Older applicants can shop for a mortgage
The inquiries most likely to result in a cut are from homebuyers aged 25 to 34. However, that might not mean that people in this age group are more creditworthy. Data suggests that as applicants get older, they are more likely to forgo an approval, meaning they don’t end up in the bucket of “origins” of at least one lender.
Applications resulting in approval but without a loan being issued are highest among older applicants. This could indicate that more experienced borrowers are filling out applications from multiple lenders and ultimately choosing the one that best meets their needs.
Tip to the borrower: Buy your mortgage as you would any major financial product. Shop for the best rate could save you a lot of interest over the life of your loan. Also, the underwriting process is perhaps the most labor-intensive step in buying a home, so you should choose a lender who is responsive and easy to send in the reams of paperwork they request.
Approval rates improve in several states
The average denial rate among states for all types of residential mortgages (eg, conventional, FHA, USDA, etc.) was 7% in 2020, ranging from 5% to 10%, as in 2019. However, the states with the highest rate and the lowest refusal rates have been revised slightly.
Six states had the lowest refusal rates, 5%, in 2020: Colorado, Idaho, Minnesota, Oregon, South Dakota and Utah. Only two states had 5% rejection rates in 2019.
Three states had the highest refusal rates, 10%: Florida, Mississippi, and New York.
Analysis methodology available in the original article, published on NerdWallet.
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Elizabeth Renter writes for NerdWallet. Email: [email protected] Twitter: @elizabethrenter.
The article Why might your mortgage application fail? Learn from the 2020 refusals originally appeared on NerdWallet.