The main reasons mortgage loans are refused
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Although interest rates have risen slightly recently, they remain at historically low levels, stimulating demand for both home buying and mortgage refinancing. However, many lenders have tightened their borrowing standards due to the economic uncertainty of the pandemic, and hopeful loan seekers may struggle to gain approval. Based on mortgage data from the Residential Mortgage Disclosure Act, the refusal rate for conventional single-family loans was 18.8% (excluding withdrawn and incomplete applications) in 2019.
Mortgage application denial rates vary depending on the purpose of the loan. When reviewing the total loan applications for conventional single family loans, 2,055,774 applications were denied. At 43%, denial rates were highest for home improvement loans. Home purchase loans had the lowest refusal rate at just 10%. Refinancing requests, with and without a withdrawal component, had rejection rates in between, 16% for loans without withdrawal and 18% for refinancing loans with withdrawal.
Mortgage loan application denial rates vary not only depending on the purpose of the loan, but also depending on the race and ethnicity of the applicant. White non-Hispanic applicants and co-applicants of different races (“spouse”) had the lowest refusal rates at 17%. Blacks, Native Americans or Alaskan Natives, and applicants from two or more minority races all had a rejection rate that was more than twice that of white applicants. Hispanic or Latino borrowers also had high refusal rates, at nearly 30%. The difference in denial rates reflects differences in credit profiles and types of application between different demographic groups, but it may also reflect racial and ethnic discrimination in lending behavior.
Loan approvals and denials also vary widely by location. Refusal rates are higher in the South, Southeast, and parts of the Northeast, while refusal rates are much lower in the Midwest. This could be due to varying demographic makeup and local labor market conditions. At the state level, Mississippi and Florida have the highest mortgage rejection rates in the United States at 27.3% and 25%, respectively. On the opposite end of the spectrum, North Dakota has the lowest mortgage rejection rate in the country, at just 10.2%.
To find the main reasons mortgage loans are turned down, Construction Coverage researchers analyzed the latest data from the Home Mortgage Disclosure Act. Researchers ranked the reasons why mortgages are refused based on the percentage of all refusals that mention each reason. For each reason why mortgages are declined, the researchers also calculated the annual total of refusals and the percentage of refusals that were due to that reason for several types of loans: home buying, refinancing, cash refinancing and home improvement.
The main reasons mortgage loans are refused
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1. Debt-to-income ratio
- Percentage of all refusals: 37.2%
- Total annual refusals: 765,772
- Percentage of home purchase refusals: 36.2%
- Percentage of refusal of refinancing: 38.0%
- Percentage of cash-out refinancing refusals: 35.4%
- Percentage of home renovation refusals: 37.2%
The Debt Ratio (DTI) is the portion of gross monthly income (before tax) that is spent on debt repayment (rent or mortgage, car payment, credit cards, student loans, etc.). A lower DTI can help applicants get approved for a mortgage.
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2. Credit history
- Percentage of all refusals: 34.8%
- Total annual refusals: 715,393
- Percentage of home purchase refusals: 34.2%
- Percentage of refusal of refinancing: 24.8%
- Percentage of cash-out refinancing refusals: 25.8%
- Percentage of home renovation refusals: 44.8%
A mortgage seeker’s credit history gives lenders an idea of the risk of loaning money to a mortgage seeker. Credit history is a record of how an individual pays off debts, such as credit cards, mortgages, car loans, and other bills.
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3. Guarantee
- Percentage of all refusals: 19.7%
- Total annual refusals: 404,084
- Percentage of home purchase refusals: 13.9%
- Percentage of refusal of refinancing: 18.5%
- Percentage of cash-out refinancing refusals: 19.6%
- Percentage of home renovation refusals: 23.4%
Insufficient collateral means that the home an applicant is trying to buy, refinance, or borrow on is not worth enough for the loan amount offered.
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4. Other
- Percentage of all refusals: 12.9%
- Total annual refusals: 265,772
- Percentage of home purchase refusals: 13.2%
- Percentage of refusal of refinancing: 12.9%
- Percentage of cash-out refinancing refusals: 15.0%
- Percentage of home renovation refusals: 12.0%
The “Other” category covers all other reasons an applicant might be refused a home loan in addition to the eight covered by the Home Mortgage Disclosure Act and listed here.
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5. Incomplete credit application
- Percentage of all refusals: 8.9%
- Total annual refusals: 183,024
- Percentage of home purchase refusals: 8.5%
- Percentage of refusal of refinancing: 14.4%
- Percentage of cash-out refinancing refusals: 14.6%
- Percentage of home renovation refusals: 4.1%
Incomplete credit applications do not have the necessary information for the lender to make a credit decision, resulting in loan denial.
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6. Non-verifiable information
- Percentage of all refusals: 6.7%
- Total annual refusals: 137,968
- Percentage of home purchase refusals: 8.9%
- Percentage of refusal of refinancing: 5.8%
- Percentage of cash-out refinancing refusals: 4.5%
- Percentage of home renovation refusals: 6.4%
Mortgage refusals due to unverifiable information often stem from inaccuracies in a candidate’s employment history or tax records or from discrepancies between the application and the credit report.
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7. Insufficient cash (deposit, closing costs)
- Percentage of all refusals: 4.0%
- Total annual refusals: 82,354
- Percentage of home purchase refusals: 8.6%
- Percentage of refusal of refinancing: 4.0%
- Percentage of cash-out refinancing refusals: 4.4%
- Percentage of home renovation refusals: 1.4%
Mortgage applicants must have sufficient funds to cover down payments and closing costs and fees, otherwise lenders may decline their application.
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8. Professional history
- Percentage of all refusals: 1.8%
- Total annual refusals: 37,567
- Percentage of home purchase refusals: 3.9%
- Percentage of refusal of refinancing: 1.4%
- Percentage of cash-out refinancing refusals: 1.6%
- Percentage of home renovation refusals: 1.0%
Mortgage lenders prefer applicants to have worked in the same field for at least two years. However, a new job is not necessarily a barrier to obtaining a loan as long as it pays a stable salary.
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9. Mortgage loan insurance refused
- Percentage of all refusals: 0.1%
- Total annual refusals: 1,665
- Percentage of home purchase refusals: 0.2%
- Percentage of refusal of refinancing: 0.1%
- Percentage of cash-out refinancing refusals: 0.0%
- Percentage of home renovation refusals: 0.0%
Mortgage insurance protects the lender and allows borrowers with a down payment of less than 20% to qualify for a home loan. Applicants who are denied mortgage insurance in need of it are also likely to be denied their loan.
Detailed conclusions and methodology
A low debt-to-income ratio (DTI) is the number one reason mortgage applications are turned down. Over 37% of refused requests had a low DTI as a reason for refusal. This rate is constant for home purchase loans, refinance loans, and home improvement loans. The second most common reason for mortgage loan refusals is credit history, which accounts for almost 35% of refusals. Indeed, credit history was one reason nearly 45% of home improvement loans were turned down. The third most common reason for mortgage refusals is collateral, which was cited in about one in five mortgage refusals. Together, these three main reasons explain the vast majority of mortgage refusals.
Less common reasons for mortgage rejection are incomplete credit application, unverifiable information, insufficient cash flow, employment history, and refused mortgage insurance. While most apps list one reason for denial, some apps list two or more.
To find the main reasons mortgage loans are turned down, Construction Coverage researchers analyzed the latest data from the Federal Financial Institutions Examination Council. Residential Mortgage Disclosure Act. Researchers ranked the reasons why mortgages are refused based on the percentage of all refusals that mention each reason. For each reason why mortgages are declined, the researchers also calculated the annual total of refusals and the percentage of refusals that were due to that reason for several types of loans: home buying, refinancing, cash refinancing and home improvement.
Only conventional single-family mortgage applications were taken into account in the analysis. In the calculation of refusal rates, withdrawn and incomplete applications were excluded.
