What Options Are Available If Denied By A Bank For Your Mortgage

This BLOG On What Options Are Available If Denied By A Bank For Your Mortgage Was UPDATED On July 11, 2017

There should be no reason why a mortgage borrowers to be denied after getting pre-approved.

  • The only reason why a pre-approved borrowers gets denied for a mortgage loan after pre-approval is because they were not properly qualified in the first place.
  • Most Lenders have lender overlays. What overlays are is mortgage guidelines that is on top of the minimum lending guidelines set by FHA, VA, USDA, Fannie Mae, and Freddie Mac.
  • Most loan officers will run a mortgage applicant through Fannie Mae and/or Freddie Mac Automated Underwriting System (AUS).
  • An approve/eligible per AUS is pretty much a done deal ONLY with Mortgage Lenders With No Lender Overlays.
  • However, many loan officers make mistakes in issuing pre-approval letters once they get an approve/eligible per AUS and do not check their company’s lender overlays.
  • For example, FHA Guidelines On Collection And Charge Off Accounts state that borrowers do have have to pay off outstanding collections and charge off accounts.
  • However, many lenders will require that any collections over $7,000 be paid off as part of their overlays on collection accounts.
  • Situations like these are the main reasons for last minute mortgage loan denials.

Banks Versus Mortgage Bankers And Correspondent Lenders

  • Most home buyers go to their local bank when trying to get qualified for mortgage.
  • Home Buyers feel comfortable with their bank where they normally have their checking or savings account because they know most of the bank employees.
  • Unfortunately, most banks have tougher lending requirements than mortgage bankers due to overlays for residential purchase and/or refinance mortgage loan. 
  • Home buyers normally do not think of a mortgage banker or mortgage broker. 
  • However, banks have stricter mortgage lending guidelines than mortgage bankers or mortgage brokers. 
  • Borrowers who got denied by a bank for your mortgage, there are many other options.

Banks And Overlays

Most banks have tougher lender overlays than mortgage bankers and/or correspondent lenders.

  • Most banks require a minimum credit score of 640 FICO on FHA borrowers even though FHA minimum credit score requirements are 580
  • Most banks will not accept outstanding collections and charge offs even though FHA Guidelines On Collections And Charge Off Accounts state that borrowers do not have to pay outstanding collections and charge offs to qualify for FHA Loans.
  • Late Payments and Overdrafts are not permitted by most banks.
  • Most banks have lender overlays on debt to income ratios capped at 45% to 50% when FHA Guidelines allow up to 56.9%.
  • Banks also might require reserves and do not view past bad credit favorably.

The great benefits with banks is that they are exempt from licensing requirements because of their FDIC status so they can originate and fund loans in all 50 states.

Banks Versus Mortgage Companies

In general, banks have higher mortgage rates than mortgage bankers or mortgage brokers.

  • The reason that most banks have higher interest rates on mortgage loans is because they have higher overhead. 
  • Bankers are exempt in disclosing their mortgage yield spread premium and are exempt from licensing. 
  • Loan Officers employed by FDIC Banks do not need to get licensed in states and are exempt from licensing due to FDIC.
  • Any FDIC insured banker does not need to be a licensed mortgage loan originator and are exempt from NMLS Licensing Requirements. 
  • They can originate mortgage loans in all 50 states.

Mortgage Banker Versus Mortgage Broker

A mortgage banker is a mortgage company that funds the mortgage loans they originate. Mortgage Bankers will use their warehouse line of credit to fund mortgage loans and re-sell the loans after it closes on the secondary market.

  • A mortgage banker can also be a mortgage broker. 
  • A mortgage banker might want to broker mortgage loans that they cannot fund due to their mortgage underwriting guidelines and overlays. 
  • A mortgage broker is a middle man between a borrower and a lender.
  • Mortgage Brokers have lending relationships with wholesale lenders. 
  • A mortgage broker can shop mortgage loan to get the best possible deal for borrowers in terms of the best terms of the loan and rates. 
  • A mortgage broker gets compensated by the lender.
  • The compensation paid to the mortgage broker is reflected on the mortgage rates charged to the borrower.

Applying For Mortgage With Banks

Borrowers who are planning on getting a mortgage loan from a bank, shop various different banks because every bank has different mortgage lending guidelines and mortgage rates.

  • Borrowers who get denied by a bank they should find out why the reason for denial is.
  • They might want to consult with a mortgage broker or mortgage banker. 
  • Borrowers who have problem credit or prior bad credit or high debt to income ratio, a mortgage broker will probably be the best fit. 
  • There are lenders who can get mortgage loans for borrowers with FICO credit scores as low as 500 and debt to income ratios as high as 56.9%, 
  • There are also lenders who can get mortgage loan approvals with open collections, judgments, and tax liens.

Credit Unions

For those mortgage loan borrowers who are members of credit unions, they might want to consult with their credit union mortgage lending department and see what their credit union has to offer.

  • Credit unions normally offer great mortgage rates and terms to their members. 
  • However, they might have credit overlays and might want lower debt to income ratios.
  • There are many options available for borrowers who got denied by a bank for your mortgage. 
  • There are have mortgage bankers, mortgage brokers, and credit unions. 

Mortgage Borrowers have got denied by a bank for your mortgage and have questions, please contact us at 262-716-8151 or email us at gcho@gustancho.com.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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