What's the key factor in a lender rejecting a mortgage loan application? You may be surprised to learn that it isn't your credit score.

In fact, the one thing that would make risk managers the most reluctant to approve a mortgage application was a high debt-to-income ratio, according to a recent survey by the Fair Isaac Corporation, developer of the FICO credit scoring system.

Nearly three out of five (58.8 percent) risk managers said that a high debt-to-income ratio was the top thing that would make them hesitant to approve a loan application. By contrast, barely one in 10 (10.4 percent) named a low credit score as the main factor that would discourage them from approving a loan.

In fact, a low credit score was deemed slightly less of a risk factor than a borrower who had submitted multiple recent applications for a loan, named by 12.6 respondents. Other leading risk factors were frequent job changes in an applicant's employment history (named by 9.4 percent of respondents) and a lack of savings (named the top concern by only 8.8 percent of risk managers).

Managing debt

For potential borrowers, this means that the biggest obstacle to getting a mortgage approved is largely within their control. The biggest factor in most borrower's debt-to-income ratios is the cost of the mortgage itself, so choosing a more modest home can increase your chances of getting approved.

Of course, if you already have substantial debt when you apply for a mortgage, that can be a major impediment. In that event, your best bet may be to pay down your debt before applying.

If you have savings, you might be able to use those to pay down your debt load before applying, since debt is a bigger impediment than a lack of savings. However, that's a move that should be taken with caution and only if you've determined that buying a home is a top financial priority. It's easier to pay down debt than to rebuild savings.

Credit applications vs. inquires

It may seem somewhat surprising that multiple recent credit applications are a bigger turn-off than a low credit score, but that can signal to lenders that a borrower is having financial problems or that other lenders are finding something miss with the application.

Note that multiple applications are different from multiple inquiries. When shopping around for a mortgage, borrowers typically allow multiple lenders to pull their credit scores when seeking loan offers. These are simply inquiries and when done over a short period, have little effect on credit, whereas actually submitting multiple loan applications over a short period of time can raise a red flag.

The FICO credit scoring system is the most commonly used means of rating a borrower's credit worthiness, using a scale of 300 to 850, with scores of 700 or more generally regarded as good credit.

Published on May 16, 2008