As the spring selling market heats up, buyers continue to face increasing odds against finding their dream homes. Inventory is low, demand is high and rates have been steadily creeping upwards for months. These factors are only complicating what can already be an arduous experience for would-be homebuyers hoping to get approved for a mortgage.
In a new LendingTree study, we analyzed more than 10 million mortgage application records from the Federal Financial Institutions Examination Council's Home Mortgage Disclosure Act 2017 data set, the most recent available, which includes mortgage applications made during 2016. The data represents mortgage applications from over 6,000 financial institutions.
Ultimately, we found that nearly one out of every 10 mortgage applicants (8%) is denied at the national level.
The leading reason for denial was actually a tie between (surprise, surprise) credit history and debt-to-income ratio, which were each responsible for denials in 26% of applications.
The next biggest factor driving mortgage denials was collateral (the cause of 17% of mortgage denials), which includes the appraised value of the home versus the amount of financing the borrower seeks or other factors, such as whether the home is in a bad location like a flood plain, which might deter a lender. This is particularly concerning for homebuyers in highly competitive markets, where demand could drive home prices above their actual appraised value.
Rounding out the top three reasons for mortgage denials was incomplete applications, attributable to 14% of denials.
Mortgage denials vary by location. In some metros, denial rates were as low as 5%, while in others denial rates were as high as 13%. Here are the top five cities where homebuyers are denied for mortgages:
No. 1: Birmingham, Ala.
Denial rate: 13%
Leading cause of denials: The leading cause of rejection in Birmingham is credit history, which was cited in 32% of failed loan applications.
No. 2: New Orleans
Denial rate: 12%
Leading cause of denials: Credit history and debt-to-income are tied at 26% as the leading causes in New Orleans.
No. 3: Memphis, Tenn.
Denial rate: 12%
Leading cause of denials: Credit history also leads in Memphis at 34%.
No. 4: Oklahoma City
Denial rate: 11%
Leading cause of denials: Credit history was responsible for 27% of denials.
No. 5: Miami
Denial rate: 11%
Leading cause of denials: Debt-to-income ratio was responsible for 29% of denials.
Debt is a huge barrier to borrowers living in California. We found three California cities (Los Angeles, San Francisco, San Jose) had the highest share of borrowers who were denied because of their debt-to-income ratio.
Credit history is holding borrowers back in Louisville, Ky., Memphis, Tenn. and Philadelphia. Among failed applications in these three metros, we found the highest rates of denied borrowers due to their credit history.
The current housing market is particularly competitive. The key for homebuyers is being well-educated on the homebuying process, enabling them to be well-prepared when they enter the market. Understanding the key reasons mortgages are denied can help loan officers advice borrowers on how to avoid missteps and compete effectively to secure their dream home.