Halfway through the spring buying season, mortgage applications fell 1.2 percent for the week ending May 21 and the  unadjusted Mortgage Bankers Association’s Purchase Index fell even more.  It was down 2 percent in just one week-15 percent lower than it was a year ago at this time.

Such a decline in borrowing to buy a home in the third week of May is virtually unprecedented, but it corresponds with the anemic sales reports from the National Association of Realtors.  Sales are down year over year.  April sales are down 6.8 percent from a year ago (see April Sales Disappoint).  Cash sales continue to account for a large percentage of purchases and financed purchases have fallen far below normal even though it’s easier (not a lot easier) to get a mortgage today that it was during the mini-boon of a year ago.

According to Ellie Mae’s March data, purchase loans are closing in 41 days compared to 47 days a year ago, some 60.7 percent of applications for purchase loans are approved compared to 59.7 percent a year ago, and median FICO scores for successful conventional purchase loans have fallen from 761 to 755 over the past 12 months.  Nothing to write home about but incremental progress.

Yet a recent survey by loanDepot suggests that despite the gradual relaxation of lending standards buyers are simply giving up trying to get a mortgage.  Fear that they will not qualify for a mortgage has stopped half (50.7%)  of today’s potential home buyers from pursuing the financing they need to buy a home, according to loanDepot’s national survey released last month.

The survey found plenty of pent up demand—one in three Americans (29%) say they’d like to buy a home in the next two years and 71 percent of those who want to buy a home in the next two years will need financing.

Yet 74% of those who want to buy a home but fear they won’t qualify for a mortgage admit they haven’t taken any steps to qualify. Only 27 percent have actually taken steps to see if they can get a loan.

“We’re well into this year’s home buying season and too many potential buyers and sellers are sitting on the sidelines because they’re afraid they can’t qualify for a home loan before they’ve looked into it,” said loanDepot President and COO, Dave Norris. “While market and regulatory conditions have made it harder for many borrowers to secure a loan, consumer lending is beginning to loosen up for mortgage         borrowers including those with less than perfect credit. Potential buyers are forfeiting their dreams of homeownership before they find out what financing options are available to them. It’s never been easier than it is today to go online and research your options on a site like loanDepot. They may be better than most people think.”

So why are buyers giving up?

The survey found that:

1. Potential buyers fear they won’t qualify.  Half (53%) erroneously think it’s harder to get a loan today compared to a year ago.
2. Many potential buyers think they need a higher FICO score to get a loan than they actually do today. Half of all Americans don’t know what minimum FICO score is required to qualify for most loans, while 18 percent think they need a minimum FICO score of 680 to 770+ to qualify. In reality, 33 percent of all closed loans in Feb 2014 had an average FICO score of less than 700 compared to 24 percent one year ago.
3. Many potential buyers overestimate the impact that their debt to income ratio (DTI) has on their credit worthiness. Of those who want to buy but have given up, almost a third (34%) say their DTI is too high while 24 percent say it’s lower than what is needed. By comparison, 15 percent of those who want to buy a home but are not concerned about qualifying for a loan say that their debt is too high. In fact, industry reports show many mortgage lenders have relaxed their debt to income requirements

“Our loanDepot survey confirms uncertainty and confusion about qualifying for a loan are driving more young potential buyers away from homeownership than any other age group. However, their uncertainties and fears may be much worse than reality. Growing the first-time homebuyer market share may be as simple as going online and exploring the options.” said Norris.