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Study: Programs could have prevented mortgage application rejection

Experts could have recommended funding for closing costs and advised against disqualifying debt-to-income ratio.

Down Payment Resource, a national database that connects homebuyers to tools and services, found that one-third of declined loan applications could have been prevented with a home buyers assistance program. (John Raoux/AP)
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A recent analysis by Down Payment Resource of declined mortgage applications found that one-third of those loans were rejected for reasons that might have been resolved with the help of a home buyer assistance program.

Down Payment Resource, which is a national database for home buyer assistance programs, found that 33 percent of declined loan applications were rejected because of insufficient closing cost funds or a disqualifying debt-to-income ratio.

Your debt-to-income ratio compares the minimum payment on all recurring debt such as student loans, car payments and credit card debt, with your gross monthly income. The debt also includes your monthly housing costs, including your principal and interest on your mortgage, your property taxes and homeowner’s insurance premium. The maximum allowable debt-to-income ratio depends on each lender and loan program as well as your other credit qualifications, and generally ranges from 43 percent to as much as 50 percent.

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Down payment assistance programs are available to buyers based on different guidelines that sometimes include income limits, a maximum loan amount and, in some cases, are limited to first-time purchasers.

Down Payment Resource used loan application data, including the location of the property, the home price, loan amount, income and homeownership history to run the information through its database. That analysis found that 33 percent of declined loans were eligible for homeowner assistance that would have reduced the loan-to-value by an average of 5.85 percent. The loan-to-value on a purchase loan is the amount borrowed compared to the home price.

Many loan programs allow borrowers to make a down payment of as low as three to five percent, but they must pay mortgage insurance to the lender. Increasing the amount of cash for a down payment lowers the mortgage balance and may reduce the mortgage insurance premiums and interest rate.

The analysis by Down Payment Resource found that most declined loan applications were eligible for several home buyer assistance programs. On average, the applicants were eligible for 10 home buyer assistance programs.

For example, home buyers in D.C. may be eligible for assistance through the DC Open Doors program and the Home Purchase Assistance Program (HPAP). Earlier this summer, the DC Housing Finance Agency brought back its Mortgage Credit Certificate (MCC) program, which is available for first-time buyers and can be used with other buyer assistance programs.

The MCC allows borrowers to claim a federal tax credit for 20 percent of the interest they pay on their mortgage, which reduces their tax burden more than a tax deduction. The remaining 80 percent of their mortgage interest can be taken as a tax deduction.

For more information about the D.C. financial assistance programs, click here. Similar programs are available through state and local jurisdictions and can be searched at www.DownPaymentResource.com.

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