Mortgage Applicants Denied For Insufficient Income At Increasing Rates

As affordability sank in 2022, potential buyers struggled against rising fees and were denied loans for a lack of income, according to a new analysis from the Consumer Financial Protection Bureau.

Mortgage applications and originations declined last year as the market corrected from the low-rate-fueled pandemic housing boom. At the same time, affordability sunk to new lows, fees rose more than 20% YOY, and borrowers faced rising monthly costs.

“The higher interest rate environment had profound effects on the mortgage market in 2022, with borrowers paying much more in monthly payments,” CFPB Director Rohit Chopra said. “These trends are likely to continue given further increases in interest rates in 2023.”

Today, the national median payment applied for by purchase applicants is $2,170, close to May 2023’s record high. Average rates sit at 7.41%, their highest point since December 2000.

The combination of high rates and soaring home prices in 2022 led to more applications denied for insufficient income than ever recorded in the CFPB’s data, which dates back to 2018. 

Non-white borrowers were the most likely to be denied a mortgage due to their income, especially Asian applicants, of whom more than 50% were denied for this reason. This applied to about 45% of Black and Hispanic borrowers, and 40% of white applicants.

Income-based denials were under 40% for each one of these groups in 2018.

Hispanic and Black borrowers suffered the most across the board. They received smaller loans, were saddled with higher rates, and paid more in upfront fees than white and Asian applicants. The CFPB notes that the median interest rate for Black and Hispanic borrowers was above 5%, while the median rate was below 5% for white and Asian borrowers.

The U.S. Department of Housing and Urban Development has awarded nearly $1 million in grants for research focused on mortgage financing and homeownership gaps faced by borrowers of color and other underserved groups.

“Through this research, we look forward to learning what communities are doing to preserve and protect homeownership opportunities, particularly for home-seekers that have historically faced some of the greatest barriers to building wealth,” Solomon Greene, HUD Principal Deputy Assistant Secretary for Policy Development and Research, said.

For current homeowners, cash-out refis were the only game in town in 2022, the CFPB said. Refis overall dipped nearly 74% from 2021. Homeowners who did refinance largely took advantage of their record-high equity and chose cash-out loans from independent lenders.

Home-equity lines of credit were the only form of refinance to rise from the year prior, though they did not account for the majority of refis. Unlike cash-outs, depository institutions originated most of 2022’s 1.27 million HELOCs.

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