How To Avoid Being Denied By Bank And Options Borrowers Have


This BLOG On How To Avoid Being Denied By Bank And Options Borrowers Have Was UPDATED On February 16th, 2019

The first lender most first time home buyers normally go to is their local bank to qualify for a mortgage.

  • Unfortunately, not all lenders have the same lending requirements on FHA, VA, USDA, and Conventional Loans
  • One lender may require 640 to qualify for FHA Loans while another will require the minimum HUD Credit Score Requirement of 580 to qualify for FHA Home Loans
  • Same with VA Loans
  • The Department Of Veteran Affairs does not have a minimum credit score requirement for veteran borrowers to qualify for VA Home Loans
  • Department of Veteran Affairs does not have a maximum debt to income ratio requirement on debt to income ratio on VA Loans
  • Most VA Lenders have maximum caps on VA Loans of 45% to 50%
  • Most VA Lenders will require a 620 credit score
  • The Gustan Cho Team has no overlays on government and conventional loans
  • We do not require a minimum credit score on VA Loans

One of our Senior Loan Officers at The Gustan Cho Team at Loan Cabin Inc. recently closed on a VA Loan with a 582 credit score with a 60% debt to income ratio.

Typical Home Loan Mortgage Process

There is no reason why any borrower should get denied by bank and/or stress during mortgage process. The main and most often the only reason why denied by a bank or stressing during the mortgage process is that the borrower was not properly qualified by their loan officers.

Here is how the mortgage process works:

  • Borrowers get interviewed by a mortgage loan originator
  • The loan originator have them complete a mortgage application and collect basic documents
  • The loan originator then runs a credit check and runs Automated Underwriting System
  • If the borrower gets an approve/eligible per Automated Underwriting System (AUS), the mortgage process proceeds
  • Several things happen
  • First, they can get approved for a mortgage loan they apply for
  • Second, they can get conditional mortgage approval but not the amount they originally requested
  • Third, they do not qualify for a mortgage yet but can shortly 

The Gustan Cho Team at Loan Cabin Inc. has no overlays on FHA, VA, USDA, Conventional Loans. We just go off by AUS Findings. However, most lenders have mortgage lender overlays. It is due to overlays that borrowers either stress out during the mortgage process or get denied by the bank on their mortgage.

Denied By Bank Due To Bank’s Lender Overlays

Banks normally have tougher and more conservative mortgage lending guidelines than credit unions, mortgage bankers, and mortgage brokers.

  • Banks are known to have many lender overlays
  • What are overlays: 
    • Whether borrowers 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 borrowers an approve/eligible if borrowers meet the minimum federal mortgage lending guidelines
    • However, lenders can have additional mortgage guidelines that are above and beyond of the minimum mortgage guidelines
    • This is called overlays

Lenders With No Investor Overlays

There are lenders that just go off the findings of the automated underwriting system who are mortgage lenders with no overlays.

  • However, banks, credit unions, and mortgage bankers have their own mortgage lending overlays
  • Overlays are additional mortgage lending guidelines on top of those from the automated underwriting system
  • As an example, to get a 3.5% down payment FHA Loan, FHA only requires a borrower to have a credit score of only 580
  • Any lender with no FHA overlays can get borrowers approved and closed with a 580 credit with 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 loan applicants to have a minimum of a 620 or 640 credit score just to get in the door.

  • Many first time home buyers are not experienced as seasoned home buyers
  • Many think that just because they do not qualify do their credit scores at their local bank that they cannot qualify for a mortgage elsewhere
  • This is absolutely not the case
  • Unfortunately, many loan originators at banks do not tell their applicants this fact
  • Most first time home buyers feel that they cannot get a mortgage until their credit scores improve

What If Bank Denies Mortgage Request?

Banks also have overlays when it comes to debt to income ratios.

  • Debt to income ratios is the sum of the 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 monthly gross income
  • The maximum debt to income ratio that FHA allows is 56.9% DTI to get AUS Approval
  • However, many banks have debt to income ratio mortgage lender’s overlays
  • Overlays on DTI may the DTI to maximum 45% to 50% DTI
  • There are banks that cap the debt to income ratios at 50% if the borrower’s credit scores are over 680
  • If a bank tells borrowers they do not qualify for a mortgage originally requested, then the problem can be because they have debt to income ratio overlays or other overlays
  • If this is the case where borrower got denied by bank due to high debt to income ratios they need to consult with another lender who has no overlays

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

Home Buyers with a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, most banks will not allow any late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

  • If that is the case where borrower got denied by bank, there are options
  • Borrowers can consult with a lender with no overlays
  • Late payments after bankruptcy and /or foreclosure is not a deal killer

Gustan Cho Associates has no overlays. Borrowers with late payments after bankruptcy and/or foreclosure with an Automated Underwriting System Approval can qualify for a mortgage.

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
  • Borrowers who do not meet minimum credit tradelines, they might be denied by bank for mortgage with that particular lender
  • Credit Tradelines are not federal lending mortgage guidelines but are overlays by individual lenders
  • Borrowers do have options
  • Many Lenders do not require credit tradelines
  • There are lenders that 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 as the following:
    • utility companies
    • insurance companies
    • cell phone companies
    • rental verification
  • Borrowers denied by bank due to not having traditional credit tradelines have options
  • There are mortgage lenders that will accept mortgage borrowers with no credit scores and no traditional credit tradelines

Applying With Lender With No Overlays

The Gustan Cho Team is a national direct lender with no mortgage overlays on government and conventional loans. Borrowers who need to qualify for mortgage with a lender with zero overlays can contact us at The Gustan Cho Team at Loan Cabin at 262-716-8151 or text us for faster response. Or email us at We are available 7 days a week, evenings, weekends, and holidays.

Gustan Cho

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