You thought doing your taxes was a nightmare? Wait until you apply for a mortgage. It’s kind of like doing your taxes, only it takes way longer, costs more, and you get graded on it: Pass/fail.
About one in every eight mortgage applications was denied in 2016 (the most recent data available), for a total of nearly 600,000 rejections, according to NerdWallet’s 2018 Home Buyer Report.
Incomplete applications accounted for 10% of those rejected loans, but assuming you fill out everything correctly and submit all the required paperwork, here are the three most likely reasons you might get an ‘F’ on your mortgage application.
1. Debt-to-Income Ratio
Most lenders want your combined monthly debt obligations — stuff like student loans and car payments, plus your potential mortgage — to eat up 43% or less of your gross monthly income. In an age where more and more homebuyers are burdened with excessive student loan debt, and the average new car payment is $502 a month, it’s easy to see why this derailed 28% of mortgage applications in 2016.
The good news: Paying down credit card debt and other balances will not only help lower this ratio in your favor — it can also raise your credit score pretty quickly. Speaking of which…
2. Credit History
Poor credit sank about 21% of denied mortgage applications. Mortgage lenders are stricter than auto lenders when it comes to credit, and generally want to see a credit score of at least 620 — though the FHA and VA will lend to home buyers with credit scores in the 500s.
To get the best rates, borrowers need excellent credit — meaning a FICO score of 760 or higher, according to credit expert John Ulzheimer. (And a better rate equals a lower monthly payment, which lowers your chances of being denied for Reason No. 1.)
Another 17% of mortgage denials were chalked up to collateral. While that sounds vaguely loan sharky, it’s a real thing, referring to the appraised value of the home you’re looking to buy.
If you agree to buy a home for $400,000, the lender will send out an independent appraiser to assess the home’s market value based on other comparable sales in the area (“comps”). They want to know the home is really worth all that loot they’re giving you.
If the appraisal comes in at or above $400,000, everything’s hunky dory. But if the appraiser pegs the value at something less — say, $375,000 — you’ve got a problem. Suddenly, all the numbers that the mortgage was predicated on don’t add up anymore.
At that point, you still have options — you can increase your down payment to make up the difference, or try to convince the seller to lower the price or pay for a second appraisal, among other tactics. But it could mean the loan falls through, or that you decide to back out if you realize the house was overpriced.
4. Modern-Day Redlining
Unfortunately, there might be fourth reason: A recent analysis of 31 million mortgage records by Reveal, the public radio program from the Center for Investigative Reporting, found that African Americans and Latinos are routinely denied mortgages at a higher rate than white home buyers in dozens of U.S. metro areas — including Atlanta, Orlando, Fla., and Washington — even after controlling for variables like income, size of the loan, and neighborhood. In Philadelphia, for example, people of color were nearly three times more likely to be denied a home loan.
Lenders claim this is not because of discrimination, but because minority borrowers tend to have lower credit scores — which, you’ll recall, is the No. 2 reason mortgage applications get rejected. This explanation is… well, the best you can say is that at least it’s plausible. Credit scores are considered proprietary information, so Reveal wasn’t able to control for them as a variable. Nor were debt-to-income ratios publicly available. It’s also plausible that that’s a very flimsy defense.