Many people worry about getting turned down for a mortgage when buying a home in Albuquerque. Although mortgage rates have risen significantly in the past few weeks, they are still relatively low, so many people are looking to jump into the market before they go much higher.
That makes them wonder whether they’ll be approved or not.
According to a study by NerdWallet, only 8% of mortgage applications were denied in 2020. However, there were 58,000 more denials in 2020 than in 2019. This was in part due to an increase in applications in 2020.
What was the most common reason for denials?
The Leading Reason for Mortgage Denials
DTIs or debt-to-income ratios are the most common reasons mortgages are denied. In fact, DTI accounted for 32% of all denials.
That’s not necessarily a new phenomenon either.
The debt-to-income ratio and low credit scores are the two most common reasons for mortgage rejection. Low credit scores account for 26% of mortgage rejections.
What is Your DTI?
You calculate your debt-to-income ratio by adding up all of your monthly debt payments. Those include credit card payments, auto loans, personal loans, student loans, and child support. Once those totals are added together, it’s divided by your gross monthly income.
The majority of lenders require borrowers to have a DTI of 36% or less, although there can be some variation.
In the case of a $7,000 gross income and a $2,500 monthly debt, you would have a DTI ratio of about 36%.
What is so important about DTI for lenders?
A lender wants to know how much debt a client can take on before they start having trouble repaying it. Using the DTI, they determine the amount they are willing to lend based on how much you can afford.
DTI is considered by lenders to be a very strong risk indicator. An insufficient income or too much debt makes you an unappealing borrower to a lender. Their perception would be that you would add yet another payment to a budget that is already stretched thin.
What To Do If You’re Denied Because of DTI
You have options if your DTI is higher than 36%.
You must first find a way to reduce your monthly debt payments. Increasing your income would be ideal as well.
You should tackle your highest-interest debt first when dealing with a problematic DTI. Credit cards usually fall into this category. After that, you can move on to any personal loans or car loans.
You can reap many benefits by improving your DTI. You’re boosting your credit score when you pay off your debt, and you’re freeing up some of your income when you do so.
Low credit scores are another major factor for denial.
Get a copy of your credit report before you even start thinking about applying for a mortgage. You need to see your score and know that lenders will assess your history of payments. Lenders tend to like to see scores that are 760 and higher to offer the most competitive interest rates.
Of course, DTI and credit score aren’t everything you need to get approved for a mortgage. You also need cash reserves and down payment, and proof of income.
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