Why Are Loan Approvals Harder to Get?

BY

Bobbi Pronin

.

November 14, 2023

A businessman sitting at a computer

If you’ve observed that buyers with good credit ratings are having a tougher time getting mortgage loans approved, you are, unhappily, correct. Research shows banks and other lenders in recent months have seriously tightened lending standards, so that buyers not only have to look harder for a willing lender, but they must also provide a lot more documentation to get approved.

According to the Federal Reserve Bank of New York’s Survey of Consumer Expectations, the overall rejection rate for credit applicants has increased to almost 22 percent overall, the highest level since 2018, with as much as a 13 percent rejection rate for mortgage loans.

The primary culprit, according to a CNN discussion with Bankrate’s Chief Financial Analyst Greg McBride, is the Federal Reserve’s rate-hiking action over the past months. As the Fed hikes its Federal Funds Rate, so does the rate that banks charge to borrow and lend, so that money simply costs more.

The failures of some regional banks may have added to the tightening of loan approval standards, and a new rule proposed earlier this year increasing the level of capital larger banks are required to hold, have made some lenders – including some smaller banks – more cautious about lending money.

As a result, even buyers with excellent credit are finding the loan process is taking longer than usual, and many are being granted loans only after submitting extra documentation, such as tax returns and other documents dating back to 2020.

That’s because rising interest rates impact payment calculations. Elevated loan payments increase a buyer’s debt-to-income ratio, which can affect their ability to repay the loan, a fact that all lenders consider.

At the same time, homeowners with interest rates in the three or four percent range are less likely to sell at this time, keeping housing inventory tight – and the resulting shortage of homes is keeping prices high.

Since the current cycle of Federal Reserve rate hikes began, consumer inflation has dropped from a year-over-year peak of 9.1 percent in June 2022 to 3.7 percent in September 2023 – and Fed officials may or may not raise rates once more this year. But whether or not another rate hike is imminent, most policy makers see lower rates in 2024 – and it’s a safe bet that if that happens, lending standards may begin to ease along with them.

---

This material is meant for general illustration and/or informational purposes only. Although the information has been gathered from sources believed to be reliable, no representation is made as to its accuracy. This material is not intended to be construed as legal, tax or investment advice. You are encouraged to consult your legal, tax or investment professional for specific advice.

About Bobbi Pronin

Bobbi Pronin is an award-winning writer based in Orange County, Calif. A former news editor with more than 30 years of experience in journalism and corporate communications, she has specialized in real estate topics for over a decade.

Bobbi is not an employee of Anywhere Integrated Services or affiliated with its title companies.