First Time Home Buyers: Denied By Bank?

Most first time home buyers normally go to their local bank to see if they qualify for a residential mortgage loan.  They get interviewed by a residential mortgage loan originator and the loan originator have them complete a mortgage application and the loan originator then runs a credit check.  Several things happen.  First, they can get approved for a mortgage loan they apply for.  Second, they can get a mortgage loan approval but not the amount they originally requested.  Third, they can get denied for a residential mortgage loan altogether.

Denied By Bank Due To Bank’s Lender Overlays

Banks normally have tougher and more conservative internal mortgage lending guidelines than credit unions, mortgage bankers, and mortgage brokers.  Banks are known to have stricter mortgage lending overlays.  What are overlays:  Whether you apply to a bank, credit union, mortgage banker, or mortgage broker, they need to first get you an automated approval via either Fannie Mae’s Automated Underwriting System or Freddie Mac’s Automated Underwriting System.  The automated underwriting system will then issue you an approve/eligible if you meet the minimum federal mortgage lending guidelines.

Lenders With No Investor Overlays

There are mortgage lenders that just go off the findings of the automated underwriting system who are mortgage lenders with no mortgage lender overlays.  However, banks, credit unions, and mortgage bankers have their own mortgage lending overlays which are additional mortgage lending guidelines on top of those from the automated underwriting system.  As an example, to get a 3.5% down payment real estate purchase mortgage loan,  FHA only requires the mortgage loan borrower to have a credit score of only 580 FICO.   Any mortgage lender with no FHA mortgage lender overlays can get you approved and closed on your mortgage loan as long as you have a 580 FICO credit score and have an approve/eligible per DU FINDINGS and/or LP FINDINGS.  DU FINDINGS is Fannie Mae’s version of the Automated Underwriting System and LP FINDINGS is Freddie Mac’s version of the Automated Underwriting System.

Lenders With Investor Overlays

However, most banks and credit unions will have mortgage lender overlays which require mortgage loan applicants to have a minimum of a 640 FICO credit score just to get in the door.  Many first time home buyers are not experienced as seasoned home buyers and think that just because they do not qualify do their credit scores at their local bank that they cannot qualify for a mortgage loan elsewhere and this is absolutely not the case.  Unfortunately, many mortgage loan originators at banks do not tell their mortgage applicants this fact and most first time home buyers feel that they cannot get a mortgage until their credit scores improve.

What If Bank Denies Your Mortgage Request?

Banks also have mortgage lender overlays when it comes to debt to income ratios.  Debt to income ratios is the sum of the mortgage loan borrowers total minimum monthly payments such as minimum credit card payments, car payments, student loan payments, child support, alimony, and other monthly minimum credit payments divided by the borrower’s monthly gross income.  The maximum debt to income ratio that FHA allows is 56.9% DTI.  However, many banks have debt to income ratio mortgage lender’s overlays that might cap the DTI at 45%.  There are banks that cap the debt to income ratios at 50% if the borrower’s credit scores are over 680 FICO.  If a bank tells you that you do not qualify for a mortgage loan you originally requested, then the problem can be because they have debt to income ratio overlays.   If this is the case where you got denied by bank due to high debt to income ratios, you need to consult with a mortgage broker who has mortgage lenders with no mortgage lender overlays.

Late Payments After Bankruptcy, Foreclosure, Deed In Lieu Of Foreclosure, And Short Sale

If you are a home buyer with a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, most banks will not allow any late payments after you had a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  If that is the case and you got denied by bank, there are options.  You can consult with a mortgage broker that is affiliated with a wholesale mortgage lender that does accept late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

Denied By Bank Due To Bank’s Minimum Credit Tradeline Requirements

A credit tradeline is a credit account that has been seasoned for at least 12 months.  Most banks will require three to four credit tradelines that have been seasoned for 12 to 24 months.  If you do not have these minimum credit tradelines, you might be denied by bank for a residential mortgage loan.  You do have options.  Many mortgage lenders do not require credit tradelines and allow for non-traditional credit tradelines to be used in lieu of traditional credit tradelines.  Non-traditional credit tradelines are credit established by non-traditional credit such a utility companies, insurance companies, cell phone companies, and rental verification.  If you are denied by bank due to not having traditional credit tradelines, you have options.  There are mortgage lenders that will accept mortgage loan borrowers with no credit scores, and no traditional credit tradelines.

Gustan Cho

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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