Debt-to-income ratios have overtaken bad credit history as the #1 reason mortgage applications are being denied for all types of loans (FHA, VA, conventional).

Take a look at the reasons one in 10-mortgage applications have been denied this year:

  • 125,000 denials due to debt-to-income ratios
  • 90,000 denials due to credit history
  • 60,000 denials due to collateral
  • 48,000 denials due to incomplete applications
  • 20,000 denials due to unverifiable information
  • 19,000 denials due to insufficient cash for down payments and/or closing costs
  • 16,000 denials due to employment history
  • 12,000 denials due to mortgage insurance denials

Debt-to-income ratio denials have been increasing over the last 6 years. In 2012, 35.1% of mortgage application denials were caused by debt-to-income ratios; in 2017, 37.7% of denials were due to debt-to-income ratios and in 2018, 38.6% of mortgage application denials were cause by debt-to-income ratios.

Likely, this rise in application denials caused by debt-to-income ratios reflects the erosion of affordability as home prices continue to climb faster relative to wage growth.

It makes sense that debt-to-income ratios would red flag items from a lender’s point of view. In the event of a negative income shock, loans with higher debt-to-income ratios are at greater risk of default than loans with smaller debt-to-income ratios.

Additionally, according to staff overseeing the Home Mortgage Disclosure Act (HMDA), the current housing cycle and its tight supply of starter/lower-end homes have magnified the impacts of price growth, interest rate hikes and lack of affordability for first-time buyers who tend to have higher debt-to-income ratios.

And, by the way, the ever decreasing volume of mortgage applications, both purchase and refinance applications, are due to lack of affordability and rising interest rates.