Why Might Your Mortgage App Fail? Learn From 2020’s Denials

Mortgage application data from years past can teach important lessons. It may not be as engrossing as a memoir, but the story the data tells could help aspiring homeowners make their dreams reality.

In 2020, as potential home buyers hustled to take advantage of ultra-low mortgage rates, more than half a million mortgage applications were denied. A look at lender data filed with the federal government paints a picture of the homebuying rush and shows how denials hit one loan type particularly hard. It also yields tips for buyers hoping to denial-proof their own mortgage applications.

Applications climbed, but denial and approval rates held steady

Demand was high and mortgage rates for 30-year loans were relatively low — roughly 3.5% coming into 2020. But as the year went on and a pandemic changed everything, rates dropped below 3%, bringing borrowers out of the woodwork during a most unusual time and pushing the housing market into a frenzy.

In 2020, lenders processed 10% more mortgage applications than the year before — about 6.5 million compared with 5.9 million in 2019, according to data filed under the Home Mortgage Disclosure Act, or HMDA. Though the share of those applications that were approved, 73%, and the share denied, 8%, were the same year over year, the increase in applications resulted in about 58,000 more denials in 2020.

When mortgage applications are up, lenders take steps to ensure the flow of money to borrowers remains manageable. One way of doing this is tightening borrowing standards, or making it a little more difficult for aspiring home buyers to get approved. For example, from May through December 2020, the average credit score among successful conventional mortgage borrowers ranged from 755 to 759. In 2019, during the same period, the average score ranged from 754 to 755, according to data from Ellie Mae, a mortgage processing company.

Debt-to-income ratio remained the most common primary denial reason, accounting for the main reason of 32% of all denials. In fact, 21% of applications with a DTI of 50% to 60% were denied, and 85% of those with a DTI of more than 60% were denied. That’s higher than in 2019, when those rates were 18% and 78%, respectively.

Borrower tip: Keep your debt low. This is good advice for a multitude of reasons, including the cost of interest, but particularly if you’re hoping to qualify for a mortgage. A debt-to-income calculator can determine your DTI and help map out how to take it lower. High DTIs flag to lenders that you might have trouble keeping up on all of your financial obligations. Aim to keep it as low as possible, but lower than 40% is a good place to start.

Denials are up among traditionally flexible FHA loans

Loans backed by the Federal Housing Administration, or FHA loans, are commonly marketed as good mortgages for first-time home buyers or people with less-robust credit histories. This is because a lender's risk is mitigated: The federal government guarantees it’ll get paid, even if the borrower can’t pay.

But even FHA loans were more difficult to get in 2020; denials among these mortgage types were up from 10% in 2019 to 12%, a difference of about 25,000 denials. Denials for conventional mortgages, on the other hand, remained steady at 7%, according to the HMDA data. From May to December 2020, the average FICO score for FHA borrowers ranged from 682-684 compared to 674-679 during the same period in 2019, according to data from Ellie Mae.

Credit history was the second most cited reason for denial of FHA applicants, accounting for 26% of those denials compared with 16% of conventional loan denials.

Borrower tip: FHA loans remain an easier get for applicants with less-robust credit history, but this doesn’t mean they’re a slam-dunk approval. Though the standards for qualification are generally more forgiving than a conventional mortgage, they can vary from year to year. Still, take steps to build your credit score, decrease your DTI by paying down debt and borrow only what you can afford.

Older applicants may shop around for a mortgage

Applications most likely to result in an origination are those from home buyers 25 to 34 years old. However, this may not mean those in this age group are more creditworthy. The data suggests that as applicants get older, they’re more likely to walk away from an approval, which means they don’t end up in the bucket of “originations” from at least one lender.

Applications resulting in an approval but without a loan being originated are highest among the oldest applicants. This could indicate more seasoned borrowers are filling out applications with more than one lender and ultimately choosing the one that best fits their needs.

Borrower tip: Shop for your mortgage as you would any important financial product. Shopping around for the best rate could save you considerably in interest over the life of your loan. Also, the underwriting process is perhaps the most labor-intensive step in homebuying, so you want to choose a lender that is responsive and makes sending the reams of paperwork it requests a breeze.

Approval rates improve in several states

The average denial rate among states for all home mortgage types (e.g., conventional, FHA, USDA, etc.) was 7% in 2020, ranging from 5% to 10%, as it did in 2019. However, the states with the highest and lowest denial rates were shuffled slightly.

Six states had the lowest, 5%, denial rates in 2020: Colorado, Idaho, Minnesota, Oregon, South Dakota and Utah. Just two states had 5% denial rates in 2019.

Three states had the highest, 10%, denial rates: Florida, Mississippi and New York.