Aspiring homeowners are unable to get a mortgage for five specific reasons, according to a new report.
The top reasons lenders reject prospective home buyers’ mortgage applications include: having a too-high debt-to-income ratio; having a low credit score; and not having enough money in reserves, according to a new report by the National Association of Realtors.
In its annual Profile of Home Buyers and Sellers, the real-estate 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 would-be borrowers reported as the reasons they were rejected for mortgages; lenders were not surveyed.
Home buyers are having a tough time at present, with the rate on the 30-year mortgage hovering at a 23-year high. High mortgage rates mean many buyers face steep borrowing costs when trying to take out a mortgage, which can add hundreds of dollars to monthly housing payments.
According to the NAR report, about half (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, auto-loan debt and any other borrowing. It’s calculated by dividing all of your monthly debt payments by your gross monthly income.
A debt-to-income ratio of 15%, for example, means 15% of your income goes toward debts. A “good” debt-to-income ratio is around 35%, according to LendingTree, but mortgage lenders will approve mortgages for buyers with debt-to-income ratios up to 45%, according to Fannie Mae, if the borrower meets other criteria such as having a good credit score and sufficient cash reserves.
Debt also plays a role in preventing people from saving for a down payment on a house. First-time buyers said some of the biggest obstacles to saving for a house include student-loan debt and auto-loan debt.
A fifth, or 21%, of those who were rejected for a mortgage 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 their income was not able to be verified. Unverifiable income can be an issue that gig workers may run into, if they are not able to come up with a statement that shows what 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. Down payments have grown to an average of 8% this year, up from 6% last year, the NAR report found.
NAR’s Lautz noted that the data was self-reported, so it may not be the only reason or exact reason why a home buyer was rejected by a lender.
“Sometimes, a home buyer may not actually know why they’re being rejected,” Lautz stressed.