It’s estimated that about 1 of every 8 mortgage applications is denied. And the vast majority are rejected for one of three reasons.
According to a Federal Reserve study of 2015 mortgage application data, the No. 1 factor behind mortgage denials is failing the lender’s debt-to-income (DTI) ratio test. This calculation indicates what proportion of your monthly income is allocated to recurring debts, including your new mortgage payment.
If the sum of your monthly payments to credit cards, car loans, student loans and your new mortgage totals $3,000, and your monthly gross income is $6,000, your DTI would be 50 percent. But lenders want to see that ratio at 45 percent or lower, so exceeding it will likely get your application stamped “Denied”.
Almost as common in triggering rejections is an inadequate credit score or history. If your score is too low, that’s an obvious red flag. But a decent score isn’t enough on its own. Lenders also want to see a sufficient length and breadth of credit history, meaning someone with a single credit card on their report, opened in the last year or two, won’t give the lender ample evidence to predict your payment behavior.
The third most common reason for denial is a problem with the property’s price. If the appraisal finds the price is significantly higher than the home’s fair market value, the lender won’t be willing to fund the originally requested mortgage amount. This often happens in bidding war situations, where the price is driven high enough that the winner actually becomes a loser in finalizing the mortgage.
All of these problems can be solved by the applicant either over time or by choosing a different property. But being aware of these factors in advance may save you from being rejected in the first place.