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Study Shows 32% Of Applicants with Low Credit Score Were Denied Mortgages in 2017

All of us dream of having our own house. We envisioned living in our dream house and imagined our future life in it. Now that you’re an adult and you’re capable of earning money, you might’ve started saving money to fulfill your life goals.

Or even better, you already started canvassing to look for your perfect house. While the process can be exciting, it might also become a stressful one especially if your application gets denied. In fact, new research shows that those applicants with lower credit scores increase their chance of rejection for a mortgage application. Studies show that the Observed Denial Rate increased up to 32% compared to the previous 11% rating.

The Study

The said research was released by the Urban Institute’s Housing Finance Policy Center (HFPC). The said firm use the public’s available data and compared it with CoreLogic’s data to calculate and analyze the Real Denial Rate (RDR). The ODR is usually calculated once the government releases the Home Mortgage Disclosure Act data. The HFPC will then be adjusted based on the data presented as well as the applicant’s credit score to get a more accurate picture on which applicants can be approved or denied for mortgages.

The findings show that the RDR increased up to 52% for small-dollar mortgages or those house properties priced below $70,000. At first glance, the potential mortgage applicants may think they’re likely to get their application approved if they purchase a less expensive home, but that isn’t the case.

According to the HFPC report, they highlighted that small-dollar loans have higher real denial rates compared to other types of mortgage loans an applicant can avail, especially in non-government channels. The report also attributes the high denial rates to the fixed costs coming from originating loans. This makes smaller loans like small-dollar less attractive for lenders to approve.

Homeowner’s Data

Interestingly, the denial rate of mortgage applicants didn’t vary greatly in other mortgage sizes.

This means that most low-credit score applicants still apply for mortgages in all sizes, not just with a small-dollar loan. The findings show that 34% of applicants were denied for small-dollar loans due to a low credit score.

Furthermore, around 30% of mortgage applicants for properties with values more than $150,000 were also denied. If you’re aiming to join the homeowners association as well as its ranking, this data might scare you. Why? It’s because the HFPC categorized applicants either as high-credit or low-credit based on their credit score, LTV (loan to value) ratio, DTI (debt to income) ratio, as well as the mortgage type and documentation type.

According to the report, the strongest applicant profiles must bear a credit score of 700 or more, with less than 78% LTV ratio, and less than 30% DTI ratio. The strongest applicant must also be able to place a down payment of at least 22% of the mortgage value’s worth, which is upped by 2% more than the recommended 20%. Most of all, the proposed mortgage payment must only consist or represent less than 30% of the applicant’s income to determine the applicant can afford the said mortgage.

The Credit Score

According to HFPC, an applicant should determine whether or not they’re financially ready to buy a house or property and should take care of their credit score first in order to be included in the remaining 68% mortgage application approval rate.

The data only shows that applicants must take care of their credit score if they want their mortgage applications to get approved. Credit scores have received criticisms from the past as an ineffective method to assess an individual’s financial stability. However, most lending institutions heavily rely on credit score in decision-making.

If you want to monitor the performance of your credit score, you can search the internet for a free credit report, monitoring apps, and credit score teaching to determine the status of your application.

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