By Sabrina Karl
In 2018, new rules required mortgage lenders to report the denial reason for each application they rejected, and the Consumer Financial Protection Bureau recently reported the results collected from more than 5,600 banks, savings associations, credit unions and mortgage companies.
Across all 2018 mortgage applications for 1- to 4-unit residences — including purchases, refinancings, and improvement loans — the overall denial rate was about a quarter, or 2.65 million rejections out of 10.7 million applications (24.7%).
But the denial rate varied widely by application type. New purchases had the lowest rejection rate, at just 14.6%, while refinance applications were about double that (28.1% denied for non-cash refinancings and 29.8% denied for cash-out requests). In contrast, more than 4 in 10 home improvement loan applications were rejected (42.9%).
Across all applications, the top reason lenders denied an application was due to the applicant having a higher than desired debt burden, as measured by the debt-to-income (DTI) ratio. This accounted for about a third of the rejections across application types (36.8% for home purchases, 34.3% for refinancings without cash, and 31.9% for cash-out applications).
For all mortgage types except home improvement loans, the top three rejection reasons were an excessive DTI, problems with the applicant’s credit history, and quality of the collateral (property) securing the loan.
Only for home improvement loans did the ranking differ. Here, credit history was the top reason for a rejection, accounting for almost half (46.7%) of the denials. More than 70% of improvement loan applications were reported to be second liens, which helps explain lenders’ added caution in approving the request.
The DTI threshold recommended by the CFPB for qualified mortgages is 43%. In 2018, more than half of the denied home purchase applications (53.1%) had a DTI above this level.