Elizabeth Rentter NerdWallet
The housing market in 2021 was a record. With all-time high prices and a number of listings in a deep hole, the open house looked like a Black Friday sale, pushing many potential buyers out of the fray.
In 2021, the share of all-cash buyers on home purchases trended higher in the US, but the overwhelming majority of home sales still involved mortgages. Unfortunately, like every year, many of our 2021 mortgage applications have been turned down.
A subsequent analysis of the 7.1 million mortgage applications filed that year revealed several markers of an anomalous homebuying market. A surge in loan amounts, an increase in the number of mortgage denials directly related to high-end homes, and some changes in loan types. It reflects fierce competition.
Higher house prices = more loans
Single-family home mortgages averaged $343,000 in 2021. This is a 15% increase from the 2020 average. This surge is especially notable given that these mortgages have risen by just 8% from 2019 to 2020.
Demand for housing has been high over the past few years, and this competition and high prices mean that some potential buyers will not be successful. Those who have exhausted their purchasing budget will not be able to keep up.
Thankfully, in 2022, the number of listed homes has started to rise in many markets. Price growth has slowed and a decline in home sales has ended in a bidding war. But now buyers have to contend with higher mortgage rates. For example, a 1 percentage point change from 5% to 6% on a $343,000 mortgage means $215 more monthly in home payments, or a difference of about $77,500 in interest over a lifetime. loan.
Approved, Rejected: Did the results change?
In 2021, lenders processed approximately 7.1 million mortgage applications. This is an 8% increase from the previous year, or about 500,000. Of these, 73% led to loan initiation and 7% to denial. The rest were either closed for being incomplete or were approved but never created.
Rejection and call rates have not changed much over the past few years. For example, in 2020, 8% of applications were rejected and 73% resulted in loan initiation. In 2019, these shares were about the same.
However, the reasons for these refusals have changed slightly.
Change in 2021 rejection reasons reflects higher price market
How much debt you have in relation to the amount you bring home, or your debt-to-income ratio, plays an important role in your chances of getting a mortgage approved. The DTI ratio is also (again) the most commonly cited reason for denial in 2021, accounting for 31% of denied loans.
But lenders were refusing more loans because housing prices were too high.
Collateral refers to the actual value of the home you purchased against the amount you borrowed. With lower valuations, banks take much more risk by issuing loans. In the worst case, the collateral held by the bank (housing) is not enough to cover what you owe.
Inadequate collateral accounted for 16% of mortgage rejections, up from just 13% in 2020 and 16% in 2021. This ties in with credit history as the second most common reason for rejection. 3 percentage points may not seem significant, but the change added 14,300 rejections, while the number of rejections in his credit history decreased by nearly 22,000.
Advice for Buyers: Buyers facing a debt-to-income ratio or credit history rejection have a marching order: if your lending standards are high, enter the market with low debt and a solid credit history. If you enter the , you are more likely to be approved. A collateral-based refusal is not as straightforward, but there are options.
If possible, it’s easiest to pay the difference between the appraisal price and the asking price. By increasing the down payment, you can reduce the amount you borrow and close the gap between the appraisal amount and the loan amount. If you believe your rating is incorrect, you can also request a review of your rating or renegotiate the price with the seller. Finally, if you write an unforeseen assessment on your offer to buy, you can walk away. It’s a difficult thing to do when you actually get a deal in this competitive market.
Loan Types Show Fierce Competition
The overall number of new mortgages increased by 9% in 2021, but that growth hides some interesting changes across loan types.
Traditional mortgages typically have the most stringent approval standards, but government-backed loans such as FHA and USDA loans are usually available to those with poor credit and low down payments. These programs help renters who might otherwise be evicted obtain home ownership.
Unfortunately, these loans can appear uncompetitive to home sellers. They have a reputation for being slow to raise funds and stringent evaluation criteria, and may be viewed as having a high risk of failing before the deadline.
With multiple offers on the kitchen table, sellers are likely to choose the biggest offer and the easiest deal. Cash is king, of course, but if your offer includes a mortgage, traditional loans typically move to the top of the stack.
It’s just another way the 2021 housing market has kicked out prospective buyers on the verge of qualifying to buy a home.
Advice for Buyers: In today’s market, buying a home with a USDA or FHA loan is not impossible, but it is becoming more difficult. You still need to find the right seller and the right home, but making the transaction easier can make your offer more competitive. A real estate agent who is familiar with the local market and different loan types.
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Elizabeth Renter writes for NerdWallet. Email: firstname.lastname@example.org. twitter: @elizabethrenter.