What To Do If You Are Told You Do Not Qualify For A Mortgage Loan
By Gustan Cho
Qualifying for a residential mortgage loan today is different than it was a few years ago. After the historical real estate and credit meltdown of 2008, the whole mortgage industry went through a major overhaul. Fannie Mae, Freddie Mac, FHA, VA, USDA, and portfolio mortgage lenders set up new mortgage lending guidelines. New government minimum mortgage lending guidelines were implemented. Thousands of mortgage lenders have closed their doors and many mortgage lenders that survived the Great Recession of 2008 looked for more ways of not to do a loan than to try to make a loan to a home buyer. Millions of folks were forced to file bankruptcy or go through a foreclosure due to the loss of their business or jobs. Entire industries were almost wiped out and extinct due to the mortgage collapse of 2008. Many mortgage loan programs such as no doc and stated income mortgage loan programs no longer exists. Income, credit, and debt to income ratios are the three most important factors in determining whether or not you qualify for a mortgage loan. Just because one mortgage lender tells you you do not qualify for a mortgage loan does not mean you do not qualify with a different mortgage lender. I will explain to you in a later paragraph why other lenders will qualify you for a mortgage loan when a mortgage lender tells you you do not qualify for a mortgage loan with their company.
Minimum Mortgage Lending Guidelines
There are two types of mortgage lending guidelines. The first is the minimum mortgage lending guidelines set by Fannie Mae, Freddie Mac, VA, USDA, and HUD ( For FHA loans). The second type of mortgage lending guidelines are lending guidelines called mortgage lender overlays which surpass the minimum federal mortgage lending guidelines and vary from mortgage lender to mortgage lender. A mortgage lender can set much tougher mortgage lending requirements or mortgage lender overlays than the minimum required. Many mortgage loan applicants are told that they do not qualify for a mortgage loan not because they do not meet federal minimum mortgage lending guidelines, but because of the mortgage lender’s overlays set by the particular mortgage company. Unfortunately, many mortgage lenders that tell their mortgage loan applicant that they do not qualify for a mortgage loan is not due to the federal minimum mortgage lending guidelines but because of their own mortgage lender overlays. If you are told that you do not qualify for a mortgage loan by a particular mortgage lender, find out why the reason is because you do not qualify for a mortgage loan. Is it because you do not meet federal minimum mortgage lending guidelines or is it because of the mortgage company’s internal mortgage lender overlays.
Federal Minimum Mortgage Guidelines Compared To Mortgage Lender Overlays
We will use a few examples why many mortgage applicants are told they do not qualify for a mortgage loan.
Minimum credit score requirement for FHA Loan: Minimum credit scores to qualify for a 3.5% down payment FHA insured mortgage loan under federal mortgage guidelines imposed by HUD is 580 FICO. Many mortgage lenders, especially banks, require a minimum credit score of 640 FICO due to their mortgage lender overlays. If you go to a bank and are told you do not qualify for a mortgage loan due to having credit scores under 640 FICO, then go elsewhere. There are plenty of mortgage companies with no mortgage lender overlays that will welcome your business.
Debt to income ratio requirement for FHA Loan: Maximum debt to income ratios allowed by HUD to qualify for a FHA loan is 46.9% front end debt to income ratio and 56.9% back end debt to income ratios. Many mortgage lenders will have a maximum cap on debt to income ratios. Many mortgage lenders, especially banks, will cap the back end debt to income ratios to 45% DTI. Some will go as low as 40% or lower depending on the mortgage lender. If you are told that you do not qualify for a mortgage loan due to high debt to income ratios, go elsewhere. There are plenty of mortgage lenders with no mortgage lender overlays that will be ecstatic to have your business.
Collection accounts: HUD does not require to pay off old collection account that still has unsatisfied balance. You can still qualify for a FHA insured mortgage loan without having to pay off old collection accounts with balances. However, many lenders will require you to pay off old collection accounts. However, FHA does count 5% of the unpaid collection balance as a monthly liability and will count is as a monthly expense when qualifying your for debt to income ratios only on non-medical collection accounts with balances greater than $1,000. Medical collection accounts with credit balances are exempt from this rule. If you are told that you need to pay off all of your collection account balances or get denied for a mortgage loan due to unpaid collection accounts, then go elsewhere where there are no mortgage lender overlays and will welcome your business. There are banks where they will not even look at mortgage loan applicants with collection accounts, whether is paid or unpaid, in the previous 4 years.
Conventional loans: Minimum credit score requirements to qualify for a conventional loan is 620 FICO. However, many mortgage lenders will not accept any conventional mortgage loan applicants with credit scores under 680 FICO.
Gaps in employment: Many mortgage lenders, especially banks and credit unions, will require that a mortgage loan applicant be employed with the same company for at least two years and that they have no gaps in employment. This is not a Fannie Mae nor a HUD mortgage lending guideline. You can have gaps in employment and still qualify for a mortgage loan. If you have been unemployed for six months or less and get a new job, then 30 day pay check stubs will be required in order for you to close your mortgage loan. A verification of employment will also be required to make sure that your likelihood of continous employment is likely. If a mortgage loan applicant has been unemployed or not working for six or more months, federal mortgage lending guidelines require that they be employed full time for a period of six or more months before they can qualify for a residential mortgage loan. The can have been out of work for a year or more and as long as they have been employed in a full time job for 6 or more months, they will be eligible to qualify for a mortgage loan. All mortgage applicant needs to provide a 2 year work history. If a mortgage loan applicant has been employed in a new job for six months and have been unemployed for two years, they need to provide one and one half years of job history prior to the time before their unemployment status started so the mortgage lender has a two year job history. A two year residential history is required as well.
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