A mortgage denial deprives potential homeowners of one of the pillars of the American dream.
A new study that analyzes where and why mortgage shoppers get denied provides a revealing snapshot of the high rate of denials in Florida. Four cities in the Sunshine State — Miami, Orlando, Tampa and Jacksonville — took the top spots for the highest rates of denials in an analysis by LendingTree, an online lending marketplace. The cities all had debt-to-income as a leading cause, but Miami and Tampa had disproportionately high rates of collateral as a denial reason.
The study, which delved into data from more than 10 million mortgage applications nationwide using 2018 data from the federal Home Mortgage Disclosure Act, reflects the disparate rates of denials for blacks and Hispanics in a state with an ethnically diverse population.
“Most reasons for denial are financial, but some are not borrower-specific such as concerns about the collateral,” said LendingTree chief mortgage economist Tendayi Kapfidze, who led the study.
When broken down by reasons for loan denials, the number one reason reported by lenders for turning down applications in Miami was largely due to the risk of a high degree of household indebtedness as measured by the debt-to-income ratio, which was cited in 32.4% of failed loan applications. The collateral securing the loans was next at 22.7%.
In Orlando, the major cause of denials was debt-to-income at 36.5%, then credit history at 18.8%. The leading cause of denials in Tampa was debt-to-income at 33.1%, then collateral at 19.1%. In Jacksonville, the major cause of denials was debt-to-income.
Despite the increased use of big data-driven automated underwriting and valuation, it still matters for lenders to get a physical look at properties.
“The interesting finding for me is Miami,” said Kapfidze. “The number two reason was collateral, which basically means either there was an inspection problem with the house or some other kind of title problem. I have to start to wonder about things like climate change and houses being in flood areas, which I think would pop up under that collateral reason for something getting turned down. Basically, the house didn’t pass muster as mortgageable for some reason.”
Debt-to-income ratios were another major reason for denials on home purchase applications. Kapfidze explained that lenders want to see that a borrower’s income is reasonably regular and reliable.
“The net worth of minority households is much lower than the net worth of white households, so all of that contributes to making it more financially challenging for minority households to enter homeownership,” he said. “It’s going to cause them to stretch more to get into a house or really not have the income stability that a lender would want to see.”
For those who rely on gig work, which consists of income-earning activities outside of traditional long-term employer-employee relationships, Kapfidze said, “That’s where it gets to that consistency or stability of income. Every lender is different, so some lenders would be more comfortable with somebody who earns gig income than others, especially the fin-tech lenders who use additional algorithms on top of looking at the credit report to evaluate credit worthiness. It makes it important to talk to different lenders.”
Signs of financial fragility, such as difficulty handling an emergency expense, are slightly more common for those engaged in gig work, but markedly higher for those who do so as a main source of income, Kapfidze explained.
Homeownership education provides borrowers with the information and resources they need to navigate the complicated mortgage process and make informed decisions that support sustainable homeownership.
“The thing I emphasize is education, education, education,” said Kapfidze. “Don’t be intimidated. The more educated you are, it will increase your own confidence as you enter the home-buying process.”