Denied By A Bank For Your Mortgage And Options For Borrowers

Gustan Cho Associates
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Denied By A Bank For Your Mortgage And Options For Borrowers

This BLOG On Denied By A Bank For Your Mortgage And Options For Borrowers Was UPDATED On June 16th, 2019

Denied By A Bank For Your Mortgage
Gustan Cho Associates

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

  • The only reason why a pre-approved borrower 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 are 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 Lenders With No Lender Overlays
  • However, many loan officers make mistakes in issuing pre-approval letters once they get an approve/eligible per AUS without checking with 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

Banks Versus Mortgage Bankers And Correspondent Lenders
Gustan Cho Associates
  • Most home buyers go to their local bank when trying to get qualified for a 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 broker
  • However, banks have stricter mortgage guidelines than mortgage bankers
  • 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
  • This holds true even though FHA minimum credit score requirements are 580
  • Most banks will not accept outstanding collections and charge offs
  • This holds true 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 are 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

Banks Versus Mortgage Companies
Gustan Cho Associates

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

  • The reason that most banks have higher interest rates on mortgage loans is that 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 is exempt from NMLS Licensing Requirements
  • They can originate mortgage loans in all 50 states

Mortgage Banker Versus Mortgage Broker

Mortgage Banker Versus Mortgage Broker
Gustan Cho Associates

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

Applying For Mortgage With Banks
Gustan Cho Associates

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

Credit Unions
Gustan Cho Associates

For those 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

Borrowers have got denied by a bank for your mortgage and have questions, please contact us at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com.

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