What Percentage of Home Loans Are Denied? An In-Depth Look at Mortgage Denials

Getting approved for a home loan can be tricky. According to recent data, lenders reject around 17% of mortgage applications. For some borrowers, the odds of mortgage approval are even lower. Young borrowers, low-income applicants, and those with less-than-perfect credit tend to have higher mortgage denial rates.

Understanding the factors that lead to rejections can help you boost your chances of getting approved. This article takes an in-depth look at mortgage denial rates in the U.S. which applicants are most at risk of rejection and tips for improving your approval odds when seeking a home loan.

Mortgage Denial Rates: The Current Landscape

The mortgage denial rate refers to the percentage of mortgage applications that get rejected by lenders. This rate fluctuates over time based on economic conditions.

In today’s rising interest rate environment, mortgage lending standards have tightened across the board. According to the Federal Reserve Bank of New York’s Credit Access Survey, 17% of mortgage applicants were denied in Q3 2022. This is up from just 11% in 2020, marking a significant increase in rejections.

Denial rates vary widely based on the type of mortgage. For example:

• Conventional purchase mortgages: 15% denial rate
• FHA purchase mortgages: 19% denial rate
• VA purchase mortgages: 10% denial rate
• Jumbo mortgages: 31% denial rate
• Mortgage refinances: 18% denial rate

As you can see certain mortgage products like VA and conventional loans have lower denial percentages. Meanwhile jumbo mortgages (loans above $726,200) are denied at a much higher rate.

Denial rates also differ across applicant demographics, as we’ll explore next.

Who Is Most Likely to Be Denied a Mortgage?

While any mortgage applicant can get rejected, data shows higher denial rates among certain groups. Key factors that correlate with increased mortgage denials include:

1. Young Borrowers

Younger applicants tend to have much higher mortgage denial percentages than older borrowers. For instance, 41% of borrowers under age 30 are denied mortgages according to Federal Reserve data. This compares to just 14% of applicants aged 60-79

Why are young borrowers rejected more often? Inexperience and short credit histories play a role. Most lenders want to see at least 2 years of solid credit history before approving mortgage applicants. Younger consumers are less likely to meet this requirement. Income instability and high debt levels relative to income (DTI) also contribute to the trend.

2. Low-Income Applicants

Household income significantly impacts mortgage approval odds. According to the National Association of Realtors, borrowers with incomes below $75,000 had a 32% mortgage denial rate in 2022. This was nearly triple the 12% rate among applicants earning $100,000 or more.

Lenders have to assess whether applicants earn enough to comfortably handle mortgage payments. Low-income applicants often fall short of lenders’ standards, resulting in frequent rejections. High DTI ratios due to other debts like credit cards and student loans also plague many low-income hopefuls.

3. Borrowers With Poor Credit

It probably comes as no surprise that credit scores influence mortgage approval decisions. Data from Ellie Mae found an average mortgage denial rate of just 8% among borrowers with FICO scores of 760 or higher. Meanwhile, a stunning 69% of applicants with scores below 620 were denied.

Most lenders adhere to minimum credit score requirements, often between 620 and 640. Applicants below this threshold almost always get rejected. Besides low scores, factors like missed payments, maxed-out cards, and collection accounts damage applicants’ approval odds.

4. Self-Employed Borrowers

Self-employed mortgage applicants get rejected 26% of the time on average, per Federal Reserve data. Their denial rate is about 10 percentage points higher than for W-2 wage earners.

Lenders often view self-employed borrowers as riskier. Their incomes tend to fluctuate more than salaried workers. Verifying incomes and work histories also poses challenges. As a result, denial rates for the self-employed skew higher.

5. Repeat Homebuyers

First-time purchasers generally have lower mortgage denial percentages than repeat buyers. For instance, Ellie Mae found that just 15% of first-time applicants were denied compared to 26% of repeat buyers.

Why the discrepancy? Repeat buyers often carry existing mortgage debt that dampens their DTI ratios. Lenders will recalculate these key ratios when assessing repeat buyers’ new mortgage applications. Excessive DTIs frequently trip up these applicants.

Consequences of Mortgage Denial

Getting rejected for a mortgage produces several negative effects beyond bruised egos. Most seriously, denials can derail or delay homeownership dreams. Applicants may have to spend months or years improving their financial profile before reapplying.

A mortgage denial also causes a hard inquiry on your credit. Too many hard inquiries within a short timeframe can ding your credit scores. This creates a vicious cycle where low scores due to inquiries lead to more rejections.

In some cases, borrowers get desperate after a mortgage denial and accept a predatory loan. These expensive subprime loans feature inflated rates and fees that make homeownership less affordable.

Tips for Boosting Your Mortgage Approval Odds

If you’ve recently been denied a mortgage or want the best shot at approval, focus on these areas:

• Pay down debts – Reduce credit card balances and other debts to decrease your DTI. Shoot for a DTI below 36%.

• Increase your credit score – Aim for a minimum score of 680 or higher before applying. Pay bills on time and correct any errors on your credit reports.

• Lengthen your credit history – Have at least 3-4 years of credit accounts open in good standing. Avoid opening new accounts right before applying.

• Lower your DTI – Slash recurring debts and consider ways to increase your income when possible. Make sure your total debt load stays under 43% of income.

• Avoid new hard inquiries – Limit new credit applications in the months preceding your mortgage application. Too many inquiries can temporarily knock down your score.

• Verify all application info – Double check that everything from your income to debts to employment details are reported accurately. Any discrepancies could thwart approval.

• Provide all documentation – Have all required pay stubs, tax returns, bank statements, and other paperwork ready when you apply. Missing documents can delay or derail applications.

• Consider a co-signer – Adding a co-signer with stronger finances may help compensate for your weaknesses as a borrower. Just know that co-signers are equally liable for the mortgage.

Persistence and diligently strengthening your financial profile can help you overcome an initial mortgage denial. Continue saving, paying down debts, and monitoring your credit right up until you reapply. With a focused effort, you can obtain home financing and achieve the dream of homeownership.

Parents, low-income Americans and younger generations are most likely to be denied

While pre-approval for a mortgage greatly increases the chances of getting final approval, it’s not a guarantee.