Too Much Debt And Poor Credit History Are Most Common Reasons For Mortgage Rejections

Every year, thousands of prospective homeowners encounter a stumbling block on the road to their dream home: their application for a mortgage is turned down. It’s frustrating to be denied a mortgage, no doubt about it. But what are the most common reasons people’s mortgage applications are rejected?

A new study from LendingTree aimed to find that out, looking at data from over 10 million mortgage applications under the auspices of the Home Mortgage Disclosure Act, and finding out why people were turned down.

Perhaps not surprisingly, the biggest reasons people could not secure the mortgage they wanted was because they carried too much debt and because of poor credit history. Mortgage lenders look at an applicant’s income, relative to their level of debt, and determine whether they can take on additional debt in the form of a mortgage. This is known as debt-to-income ratio, and it accounts for many denials on the part of lenders.

Nearly 10 percent of borrowers denied

The LendingTree study found that nearly 1 in 10 applicants are turned down when trying to secure a mortgage. Nationally, 8 percent of loan applications are denied each year. Poor credit score and limited credit history, along with unfavorable debt-to-income ratio, accounted for 26 percent of denials. Lack of collateral was responsible for 17 percent of denials, and incomplete applications caused 14 percent of rejections.

Credit history is vital

Having a solid credit history is important for a number of reasons. Chief among these is that, besides helping you get approved for a mortgage, it will allow you to qualify for a lower interest rate, as well.

To achieve a healthy credit score, consumers should always pay their bills on time, including utility bills, credit card minimums, student loans, and rent. They should also keep their debt low relative to their available credit. This means not maxing out credit cards, and keeping the balance to less than 30 percent of the credit limit.

Credit bureaus also look at how much new credit you apply for, how long you keep accounts open, and what types of credit you have. A long credit history with a mix of types of credit gives you a higher credit score.