Getting a mortgage from a bank can be a long, difficult process — and it doesn’t always end in success for the borrower.
Banks deny mortgage applications for many reasons.
But sometimes, depending on what’s going on with the economy overall, it can be more difficult to get approved than other times.
Let’s dig into why banks deny mortgage applications, how often this happens, and what other options a borrower has if it does happen.
How often do mortgage applications get denied?
Depending on the area you live in and the loan type, the percentage of denied mortgage applications can vary significantly.
For example, home purchase loans can have much lower denial rates than a construction or bridge loan, and certain types of refinance loan denial rates can be higher than others.
Some studies also show that loans are denied less often in the Midwest than in the South.
What types of economic factors can influence approval rates?
During periods of a struggling economy, high inflation, and high mortgage interest rates, loan denial rates also can be much higher. It becomes difficult for more borrowers to qualify and meet bank requirements in those situations.
Banks tend to tighten their requirements to protect themselves during difficult economic periods as well.
Mortgage loan requirements generally include the following:
- Good credit score
- Low debt-to-income (DTI) ratio
- Financial stability, including stable employment and income
- Property requirements, which vary by loan type
- Homeowner history of on-time payments
- Down payment amount
However, what’s more important than the amount of rejected applications is the reasons why this happens — and what to do if it happens to you.
What’s your loan scenario?
What is the most common reason a bank will deny a loan request?
The most common reason a bank will deny a loan request can vary depending on the source, but generally there are three main reasons:
- Credit score is too low
- DTI is too high
- Loan-to-value (LTV) ratio is too high
Let’s break down these top three reasons.
1. Low credit score
For bank lenders, your credit score tells them how much of a risk it is to lend to you.
If you have a low credit score and bad credit history, this tells them you may not make your payments on time, if at all, because your credit score is largely based on whether you’re making your other debt payments on time or missing them.
The required credit score varies by mortgage lenders, but often you will at least need a minimum FICO score of 620 or higher.
You are allowed to request one free credit report a year from each of the three main credit bureaus: Equifax, TransUnion, and Experian.
On the other hand, if you don’t have much credit history, banks also may deny you because they don’t have enough proof that you are a trustworthy borrower.
2. High DTI ratio
A high debt-to-income ratio and low credit score are often interchangeable as the top reason why a bank lender might deny your mortgage loan request.
Your DTI is the percentage of your monthly income that goes toward your monthly debts. A higher percentage tells bank lenders that you probably can’t take on any more debt than you currently have.
Bank lenders generally require that borrowers have a DTI of 43% or less.
With rising interest rates, DTI is becoming harder to achieve. Private lenders like Marquee Funding Group focus on property value more than anything.
3. High LTV ratio
Finally, a high LTV ratio tells a bank lender how much of a down payment a borrower can afford by comparing the mortgage balance to the property value.
An LTV is lowered by the down payment amount a borrower can afford, and certain loan types require different down payment amounts.
If a borrower can’t afford the minimum down payment, their loan application will be denied.
Self-employed borrowers and real estate investors also may be expected to put down an even higher amount to ease the lender’s worries that they can afford their monthly payments.
Other reasons you may be denied for a bank loan
Borrowers could also be denied for a mortgage bank loan because the appraisal was too low, the bank can’t verify your information, you recently changed jobs, or your application is missing information.
If your mortgage application is denied, it can be scary and stressful. Fortunately, borrowers have another route they can try: a hard money lender.
Should you choose a bank or hard money for financing?
Bank lenders must meet certain requirements to protect themselves.
Hard money lenders also must weigh the risk of a loan, but they take a different approach.
Rather than strict lending requirements, hard money lenders take a common-sense approach to lending. This approach is based on the overall merits of the deal, using their own background and expertise to evaluate individual loan scenarios.
Of course, not all hard money lenders are the same.
These professionals are individuals, investors, or funding groups that set their own lending standards. It’s up to the borrower to perform their own research on who is right for them.
If you’re unsure whether a bank loan or hard money loan is better for you, consider these questions:
- Do you have trouble meeting bank loan requirements, such as income proof, DTI, or credit score?
- Do you need a loan quickly to secure a good deal?
- Are you a real estate investor, self-employed borrower, or other borrower with a unique lending scenario?
- Do you need more flexible lending options than banks allow?
- Do you need a loan with even more difficult requirements, such as a bridge loan or new construction loan?
Hard money loans are especially helpful for borrowers with unique or challenging loan scenarios — and are the best option for those who have been denied a bank loan.
Marquee Funding Group funds loans others won’t
Marquee Funding Group is a full-service mortgage banking firm that specializes in the origination, investment sale, and servicing of privately placed real estate loans — otherwise known as private money or hard money loans.
Hard money loans are unique for their speed, simplicity, and wide range of borrower options.
Our team is unique because we are focused on building long-lasting relationships with borrowers for years of successful deals to come.
We offer:
- Single-family, multi-family, commercial, industrial, and land loans
- Owner-occupied and non-owner-occupied consumer or business purpose
- Construction, ground up, fix-and-flip, or fix-and-occupy loans
- Loan amounts from $50,000 to $20 million
- Loan-to-value (LTV) up to 70% (deal specific)
- Purchase money, rate-and-term refinance, and cash-out refinance
If you’re ready to get started, submit your loan scenario to Marquee today. We provide same-day approvals, and closings in as fast as seven to 10 days.
Our team looks forward to helping you reach all your real estate goals.