Why are more loans are being declined?
Question of the week: Why are more loans being declined?
Answer: Last week the Federal Reserve released a report on consumer debt and reported that in June, across all credit lines, credit cards, auto loans, mortgages, lenders are denying applications at the highest rate in five years, with 21.8% being declined.
The most evident reason for the denials is rising interest rates. Not surprising, is the largest group of applicants being denied are those with credit scores under 680.
Mortgage denials for purchases were 13.2% of applicants, for refinances the rejection rate was 20.8%.
The higher rejection rate for refinances makes sense in that most people who are applying for cashout refinances are looking for money to payoff debt.
What is interesting is that credit applications fell over 40% in the past twelve months, interesting because fewer applicants and higher declines means the amount of credit being extended has dropped considerably.
Why are denials increasing? There are several factors, most impacted by higher rates.
From mortgage applicants, higher interest rates is the primary reason. Homeowners who started their journey to purchase a home and getting pre-qualified for a 6.5% rate, then having a rate of 7.00% when they open escrow with a $500,000 payment, that is an increase of 5% in their payment. If they were on the edge of qualifying before, the higher payment can push them from qualified to not qualified.
Another factor for declines in California is homeowners’ insurance. As many are aware, State Farm and All State have both stopped issuing new policies for home purchase. As a result, home buyers have to go to other sources for their policies, and many of the policies being issued are a much higher premiums than the industry uses for standard qualifying calculations.
Historically, for calculating insurance premiums for estimated payments the industry uses 0.30% of the loan amount. For a $500,000 loan that is $1500 per year, or $125 per month.
In speaking with friend and insurance agent Eric, many new policies for this same transaction can be as high as $3600 per year (maybe triple that in high-fire areas), or $300 per month.
Between the higher interest rate and the higher insurance premium, a new homeowner can see their total PITI (Principal, Interest, Taxes and Insurance) increase by over $300 per month—enough to move from qualified to unqualified.
Credit applications are not the only applications seeing higher rates of decline, friend and life insurance agent Bijan informed me that the life insurance industry is also seeing higher rates of decline.
Lenders are seeing rising numbers of delinquent payments, again primarily due to raising rates, combined with fewer applicants and approvals, are tightening their underwriting, which results in fewer approved applications.
One other reason mortgage declines are higher, lack of proper preparation prior to purchasing a new home. More and more potential buyers are going on-line to complete mortgage applications. In doing this they are side-stepping working with a mortgage professional with experience in helping potential buyers determine the price, mortgage amount, and payments for their new home that will enable them to qualify and close their purchase.
For Stratis Financial, and many other mortgage companies and professionals I know in the business, we can say that our decline rate is close to zero due to the preparation we do with our clients before they write an offer.
If you, or someone you know, is in the market for a new home, please contact me to determine the optimal price for you and your new home.
To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!
Have a question? Ask me!
Rates for Friday July 21, 2023 Little activity in the mortgage markets this week. Retail sales had a very small increase in June from May; however sales are still strong overall, showing consumer confidence in the economy. Conforming rates are up a tad this week after last week’s steep drop, the high-balance rate falls down to more historic spread from the conforming rate.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 6.755% Up 0.125%
30-year high-balance conforming 7.500% Down 0.25%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Every year about this time I rent a dumpster and spend a few hours every day for several days trimming trees, bushes, wall-climbing ivy, and doing general grounds clean up. I enjoy doing the work, using all my yard toys, the clippers, the hedge-trimmers, the chain saw, while listening to either baseball games, in the mornings over the weekend the British Open, or podcasts.
With the weather we are having it does help to have a pool to dip into from time to time to cool off. The occasional Coors, or two, to quench the thirst isn’t a negative either.
Have a great week,
Dennis Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
