Brian Gunn From EarnUp: Half of All Loan Applicants Denied Since 2022: Here’s What Mortgage Lenders Should Do Now

Brian Gunn is Chief Revenue Officer of EarnUp, San Francisco, a financial wellness fintech company

Economists are reporting that the record $2 trillion in savings Americans built by mid-2021 is completely gone and household debt has hit a record $17.3 trillion. The largest increase in debt was credit cards, which grew by 16.6% between Q3 2022 and Q3 2023. Home equity loans saw the second-largest increase, growing by 8.4% over the same period. 

Consequently, debt-to-income ratios have been impacted and half of Americans who’ve applied for a loan or financial product since March 2022 have been denied. The Consumer Financial Protection Bureau also found that nearly 1 in 4 applicants who were denied (23%) pursued alternative financing, such as cash advances or payday loans, which can have rates as high as 665% in states without rate caps. This is 40 times the average credit card rate and costs borrowers an average of $520 in finance charges. Typically, these options worsen an individual’s financial standing, making it even more difficult to qualify for traditional financing.

Meanwhile, mortgage lending is down for a myriad of reasons, including an ongoing shortage of affordable housing and high interest rates that have deterred many prospective borrowers. Financial institutions are also tightening lending standards as rates rise, especially on non-qualified-mortgage (QM) jumbo residential loans (14.6%) and QM jumbo loans (15.4%), according to a Fed survey released in February.

Increasing the supply is one way to address this challenge. In fact, the Bureau of Labor Statistics reported a net increase of 39,000 jobs in the construction industry. According to the National Association of Realtors, this may strengthen the residential housing market sector. Interest rates could also fall this year, helping to relieve some of the previously tightened standards, but it’s still uncertain.

Either way, this doesn’t support would-be home buyers now who are being denied. As mortgage companies experience the ongoing slow-down, they should turn their attention to providing prospective borrowers with actionable guidance to become homebuyer-ready rather than wait for the market to rebound. This not only keeps prospects engaged but helps lenders build their own pool of borrowers while helping consumers improve their financial standing.

Forging a Path to Homeownership

As lenders prioritize borrowers with a favorable credit profile to limit their risk exposure, they may be missing out on future opportunities. Perhaps a borrower is not ready for a mortgage right now, but they might be in six months if they boost their savings. Or perhaps they need to pay down some debt first.  

Helping potential borrowers automate savings could be extremely advantageous for when lending ramps up and there is a greater supply of housing. As a result, lenders can help applicants become homebuyer-ready, create predictable revenue streams, improve retention, and reduce risk with meaningful engagement.

Similar to automating payments, users can automate and direct savings towards a down payment on a home, emergency savings, or any other financial goal. Making it even easier, users can also opt to round up debit or credit card transactions to the nearest whole dollar. Essentially, it’s like putting saving for a down payment or debt paydown on autopilot. It can also help put users on track for responsible financial management, making them a better candidate for a loan who may be less likely to become delinquent.

Building and Nurturing Relationships

In addition to helping applicants become borrower-ready, this approach also positions lenders for a long-term relationship, keeping prospects engaged until they’re ready to buy a home.

This is especially critical as competition remains fierce. Identifying potential future leads and keeping them engaged in a meaningful way will ultimately prove beneficial down the road. Rather than sitting idle or ignoring those who do not qualify today, lenders can instead create their own prospect pool. Afterall, acquiring new customers can cost as much as five times more than retaining an existing relationship.

Financial Guidance for Declined Applicants

Further helping individuals become home-buyer ready, lenders can provide applicants with actionable guidance to improve their financial standing. In fact, being declined for a loan or financial product can negatively affect an individual’s stress levels as well as contribute to depression. It also leads to avoidance. If a lender declines their application, they may never return.

Lenders can instead decline applicants in a more positive way that offers real advice and keeps them engaged. For instance, rather than a “You’ve been declined” prompt, applicants may receive a more encouraging prompt such as “You’re almost there!” This message can also include steps for the applicant to improve their credit score or how much they need to save each week to have a solid downpayment in six months. Applicants can then work toward improving their application status and lenders can keep them engaged until they’re ready for a loan. It’s a win-win.

Mortgage lenders face a challenging landscape with rising household debt, high interest rates, and stringent lending standards. However, by shifting focus from merely approving or denying applications to actively helping potential borrowers improve their financial health, lenders can create a win-win situation.

Automated savings programs, financial guidance, and positive engagement strategies can transform declined applicants into future homeowners. This proactive approach not only supports individuals in becoming mortgage-ready but also builds a loyal customer base for lenders, ensuring long-term success as the market strengthens. By nurturing these relationships and offering meaningful support, mortgage lenders can position themselves as trusted partners in the journey to homeownership.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)