Editor’s note: This is the first in a two-part series. This article explains how the overall rate of mortgage loan denial in the U.S. has declined steadily in recent years. Part two examines the leading cause of rejection, which is the debt-to-income ratio.
There’s some good news on the mortgage front. A recent industry report showed that the rate of mortgage loan denials has dropped steadily over the last seven years or so.
That means a higher percentage of mortgage applicants are being approved for financing these days. It’s the latest sign of a general easing trend within the lending industry.
Mortgage Loan Denials Have Declined Steadily
Earlier this month, the property information company CoreLogic published a detailed report on mortgage denial rates in the U.S. The overall percentage or rate of mortgage denials nationwide dropped steadily from 2010 to 2017.
The rejection rate peaked at nearly 19% during 2007. That was back when the housing market and mortgage industry was starting its meltdown, and lenders were drawing back. The denial rate would eventually drop to 10% ten years later, in 2017.
According to the report: “[Mortgage] denial rates have steadily declined through the housing recovery and a growing economy – and were lower in 2017 than in 2004. In 2017, only about 1-in-10 applications were turned down.”
Terminology: In this context, a loan “denial” occurs when a person applying for a mortgage gets turned down by the lender for whatever reason. The denial rate shows the percentage of applicants who were turned down, based on total loan application volume for that period.
To produce their report, CoreLogic used data obtained through the Home Mortgage Disclosure Act (HMDA). Among other things, the HMDA requires lenders to report a variety of loan-level information, including the reasons for loan denials in many cases. This act is primarily designed to prevent discrimintation by lenders. But it also yields valuable insights into various mortgage-industry trends, including denial rates.
It’s worth noting that in 2017, the loan rejection rate was the lowest it had been in over a decade. To put it differently, the application success rate for 2017 was the highest it has been in over ten years. That means a higher percentage of borrowers are getting approved for home loans these days.
An Easing Trend in the Lending Industry
The report mentioned above did not speculate as to why the rate or mortgage denials has declined in recent years. But it probably has to do with the overall “easing” trend within the lending industry. This is something we’ve reported on in the past. Over the past few years, it has become easier for borrowers to qualify for home loans.
For instance, Freddie Mac and Fannie Mae are now allowing higher debt levels among borrowers, for the loans they purchase from lenders. This has made it easier to qualify for financing, particularly for those borrowers with relatively high levels of debt. Standards have become more relaxed in other areas as well.
It’s logical that a general easing of borrower qualification requirements would lead to a higher closing rate, and a lower rate of denials. That’s likely the case here.
There are many reasons why a mortgage application might get turned down. They range from debt-related problems to credit issues. Having insufficient income for the desired loan amount is another factor that often leads to rejection. Borrowers must be able to demonstrate that they have enough income to make their monthly payments.
As it turns out, having too much debt is one of the most common reasons for home loan denial in the U.S. And that’s not surprising, when you consider that Americans are carrying more debt these days.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author