October 20th, 2018 12:17 PM by Jackie A. Graves, President
Don’t want to get that mortgage denied?
According to new data, you might want to avoid conventional loans—and small-dollar ones—especially if you have less than perfect
The Urban Institute
recently calculated Real Denial Rates
(RDRs), the rates
at which consumers with lower credit scores have been denied a mortgage, across
several loan types.
showed significantly higher denial rates than government-backed loans (like FHA
mortgages, for instance). According to the findings, conventional loan
applications are denied almost 50% of the time, versus just over 20% for
According to Tendayi Kapfidze, chief economist
at LendingTree, this is likely due to the higher requirements of these loans.
“The conventional market
has stricter lending standards than the government-backed market,” Kapfidze
said. “As such, if the applicant pool were the same, the conventional market
would have a higher observed denial rate. Consumers accurately judge this, thus
lower credit borrowers self-select into the government market, which boosts
their odds of approval.”
Smaller balance loans,
particularly those at $70,000 or lower, also see much higher denial rates,
especially in the government channel. Applications for loans under the $70,000
mark had a 52% denial rate, while those for over $150,000 were denied just 29%
of the time.
According to Kapfidze, there’s less for lenders to gain on these
small-dollar mortgages, making them choosier in which applicants they approve.
“Low balance loans have
thinner profit margins because the fixed costs of origination are similar
regardless of loan size,” he said. “Thus, losses on low dollar loans quickly
eat into the margin, making lenders more conservative when underwriting these
loans, boosting the denial rates.”
Overall, the Real Denial
Rate across all loan types was 36% from 2011 to 2017—right
on par with the 37% seen before the housing crisis, indicating a solid
availability of mortgage credit. In fact, according to the Mortgage Bankers
Association, credit availability is currently at historical
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