According to the 2024 National Association of REALTORS® Home Buyers and Sellers Generational Trends report, 4% of prospective home buyers had their mortgage application denied by the lender. Let’s look at the top five reasons why a mortgage lender rejected a loan application.

Debt-to-Income Ratio

Forty-eight percent of prospective buyers whose mortgage loan was denied was due to a higher than acceptable debt-to-income ratio. The debt-to-income (DTI) ratio is a percentage calculation that compares your total monthly debt payments to your gross monthly income. Lenders use this ratio to determine your ability to repay the loan for which you are applying. Every lender has different requirements, but as a general rule-of-thumb most lenders prefer a DTI below 35%, while some mortgage lenders accept up to 45% DTI.

Low Credit Score

Among prospective buyers whose mortgage loan was denied, 21% had a credit score lower than essential to secure a loan. Lenders rely on an applicant’s credit score to predict their creditworthiness based on their history of making timely payments on various kinds of loans (ex. credit card debt, car loans). The minimum credit score needed for a mortgage varies depending on the type of mortgage– Conventional, VA/FHA, USDA, or Jumbo loans. But, generally, an applicant’s chances of being approved for a mortgage increase with a higher credit score.

Not Enough Money in Reserves

Sixteen percent of prospective buyers whose mortgage application was denied did not have enough money in their reserves to meet lender requirements. Money in reserves refers to any liquid assets that an applicant has such as cash in a savings or brokerage account that can be used to cover mortgage payments if needed. Depending on numerous factors such as DTI ratio, credit score, and the type of loan, this reserve requirement varies for each applicant.

Income Unable to be Verified

Mortgage lenders were unable to verify the income for 10% of prospective buyers whose mortgage application was denied. Mortgage lenders prefer to see a 2-year work history to assess whether an applicant has a steady income to rely on to be able to make their mortgage payments. Usually, lenders use tax returns or pay stubs to verify income. However, in cases of self-employment or non-traditional jobs, it may be harder to verify income to meet this requirement.

Insufficient Down Payment

Eight percent of prospective buyers who had their mortgage application denied did not have sufficient down payment to put towards a house. Saving towards a down payment is one of the most important steps in the home buying process. Contrary to widely held belief, prospective buyers do not need to put 20% down to secure a mortgage. However, a down payment is an essential aspect of the mortgage loan process. Down payment percentage requirements vary based on the kind of loan that an applicant is applying for and must be met.

It is worth pointing out that these factors are assessed on a case-by-case basis and a mortgage lender will evaluate an applicant’s complete financial health before approving or denying a loan application. Regardless, it is beneficial to understand the several factors that have led to a mortgage application denial for prospective buyers in the past to help guide future applicants.

For more information on housing, demographic and economic trends in Virginia, be sure to check out Virginia REALTORS® other Economic Insights blogs and our Data page.