A Federal Reserve study covering millions of mortgage applications revealed the three most common reasons for mortgage loan application rejections. As would be expected, credit scores and credit histories were at the top, while valuation issues were at number three.

The top reason why mortgage applications are rejected is flunking the debt-to-income (DTI) test. During 2015, 1 in 8 home purchase loan applications were rejected. Government backed loans received higher denials (FHA, VA, U.S. Department of Agriculture). So who is getting rejected, and what can you do to avoid this scenario?

Student loans, not surprisingly, will skew a DTI to the disadvantage of first time buyers. The federal eligibility cutoff for a qualified mortgage is 43 percent. Fannie Mae and Freddie Mac may extend this a bit higher, and the FHA can also reach higher, but the upper limits may put you at risk of rejection.
The group in the number 2 category of mortgage application rejections are those with credit score issues. Since the methods of calculating credit scores are a mystery to most, taking care to build a good credit score early on, even if a mortgage is not on the horizon, is a good idea. Contacting a loan officer several months before an application is also recommended.

To falling into the third category of mortgage loan applications rejected because of valuation issues, it’s best to avoid getting involved in aggressive bidding wars which may push the house price above market value. You may not have control over house appraisals, but you do have control over when to walk away.

The Boston Herald has a full report on the Federal Reserve findings,here.

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