Out of all the mortgage questions I get, this one may be asked if someone’s mortgage application is declined:
“Why did my mortgage application get declined when I’m lowering my monthly mortgage payment, lowering the total monthly debt obligation I have, I have great credit and have never been late on my mortgage, and I have money in the bank where I can pay off the mortgage if I want and I have 50% equity in my home? It just doesn’t make sense.”
From a common sense standpoint, the borrower is exactly right. If you were the mortgage company and your borrower had great credit, was never late on their mortgage, had a lot of cash and was LOWERING their total monthly debt obligation by lowering their monthly mortgage payment, why not make the loan.
Here’s the answer.
After the “mortgage meltdown that took place beginning in 2007, Fannie Mae and Freddie Mac underwriting guidelines changed.
That is to say that it didn’t matter to those institutions that a borrower had money in the bank, great credit and had a history of making timely mortgage payments and also had a lot of equity in their home, if the debt to income ratios were too high – say over 50%, they would not buy the loan.
In a world of securitized mortgages where the majority of mortgages with loan amounts less than $417,000 are bought by Fannie Mae, if the loan isn’t saleable, it isn’t one that can get approved.
Prior to the mortgage meltdown, there were mortgages that were called “no ratio” mortgages. These loan types calculated ratios but didn’t consider them during the underwriting of a mortgage application.
So a borrower could have great credit, a substantial amount of savings and a lot of home equity and they could still get approved for a mortgage. The mortgage rate or the cost to get the “no ratio” mortgage may be slightly higher; however, it was available.
Nowadays, most mortgages are declined due to excessive ratios and it doesn’t matter what compensating factors there may be.
The “drop dead” 50% debt to income ratio guideline that declines a file irrespective of borrower savings, credit and home equity is somewhat counter intuitive, but that’s the rule – at least for now.
In conclusion, when I’m asked “Why did my mortgage application get declined when my credit is great, I have lots of home equity and more cash saved than I know what to do with?” I respond saying it’s because your debt to income ratios are too high.