Gustan Cho The Mortgage Expert,
Publish On: February 25, 2024
In this blog, we will cover and discuss a last-minute mortgage denial by mortgage underwriters and the next steps for borrowers. There is absolutely no reason why borrowers should get a last-minute loan denial by a mortgage underwriter. The number one reason for last-minute mortgage denials during the mortgage process is because the loan officer did not properly qualify borrowers. In this article, we will discuss the following points:
- The number one reason for a mortgage denial by underwriters
- The importance of qualifying borrowers prior to issuing a pre-approval letter
- Qualified income
- Ways to avoiding mortgage denial
- Key to getting mortgage loan approval
Gustan Cho Associates closes 100% of all of our pre-approved borrowers. There should never be a mortgage loan denial after the borrower has been qualified and pre-approved. There are several reasons why underwriters might deny a mortgage application at the last minute. In the following paragraphs, we will cover the reasons for last-minute mortgage denial form underwriters.
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The Main Reason For Last-Minute Mortgage Denial From Underwriters
The number one reason for last-minute mortgage denial is because the borrower was issued a pre-approval letter without being properly qualified. Loan Officers should not issue pre-approvals. All of our pre-approvals at Gustan Cho Associates are solid and have been thoroughly reviewed by the loan officer. This is why we close 100% of all of our pre-approvals. Gustan Cho Associates has no last-minute mortgage denials.
Income Verification Issues
If there are discrepancies in the income documentation, such as insufficient income to cover the mortgage payments or inconsistencies in employment history, the underwriter may only accept the application.
Credit Score Changes
A significant drop in credit score between the initial pre-approval and the final underwriting can lead to denial. This could happen if the borrower has taken on additional debt or missed payments.
Property Appraisal Problems
If the property appraisal comes in lower than expected, it could affect the loan-to-value ratio and render the mortgage ineligible for approval.
Changes in Debt-to-Income Ratio
If the borrower’s debt-to-income ratio changes unfavorably due to new debts or increased expenses, the underwriter may deny the mortgage.
Unsatisfactory Property Conditions
If the property has issues that violate lending guidelines, such as structural problems, code violations, or environmental hazards, the underwriter may deny the loan.
Undisclosed Liabilities
If the borrower fails to disclose outstanding debts or financial obligations during the application process, it can lead to denial once discovered during underwriting.
Employment Verification Issues
If the borrower’s employment status changes or cannot be verified during underwriting, it may lead to denial.
Insufficient Funds for Closing
If the borrower cannot provide proof of sufficient funds for the down payment, closing costs, or reserves required by the lender, the mortgage may be denied.
Documentation Issues
Missing or incomplete documentation, such as tax returns, bank statements, or gift letters, can lead to denial as the underwriter cannot properly assess the borrower’s financial situation.
Policy Changes or Regulatory Issues
Changes in lending policies or regulations may affect the borrower’s eligibility for the loan, leading to denial even if they were initially pre-approved. It’s essential for borrowers to be transparent and proactive throughout the mortgage application process, providing accurate and complete information to minimize the risk of last-minute denials.
Last-Minute Mortgage Denial By Mortgage Underwriters After Conditional Loan Approval
Many home buyers think that a mortgage loan pre-approval is a done deal and that the mortgage loan will fund and close. The pre-approval process is the most important stage of the mortgage process. One of the biggest reasons for stress during the mortgage process is because the loan officer issued a pre-approval letter without properly qualifying the mortgage borrower. In this article, we will discuss and cover Last Minute Mortgage Denial By Mortgage Underwriters.
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Fully Underwritten Mortgage Pre-Approvals Issued By Lenders
TBD Subject Property Mortgage Pre-Approvals are pre-approvals that have been fully underwritten by a mortgage underwriter. Borrowers who have had major prior credit issues and/or manually underwritten FHA and/or VA loans are often submitted as a TBD Subject Property Mortgage Underwrite. It is a full mortgage underwrite without the subject property. It normally takes about three days to seven days for conditional loan approval.
Pre-Approval Letter on a TBD Mortgage Loan Approval
The conditional loan approval is also the pre-approval. The majority of mortgage loan applicants who get pre-approved will close on their home loans. However, and unfortunately, many loan officers issue a pre-approval letter without having it underwritten. What these loan officers are doing is issuing a pre-qualification letter and not pre-approval. A pre-qualification letter is just a letter of intent that loan officers feel confident that the mortgage loan applicant is qualified and meets mortgage guidelines and feels that the lender is willing to proceed with the mortgage approval process.
When Is The Pre-Approval Letter Issued?
Oftentimes, loan officers issue pre-approval after the mortgage loan applicant completes the mortgage loan application. The mortgage loan originator runs a credit report and reviews the credit history and credit scores. The loan officer also runs the mortgage application and credit report through the Automated Underwriting System. If the findings of the automated approval render an approve/eligible, the mortgage applicant is pre-approved. This holds true as long as the mortgage loan applicant can satisfy the conditions of the automated approval findings. Such conditions may request the following:
- verification of rent
- remove credit disputes
- verification of funds
- other conditions
For lenders, like myself, with no lender overlays, we just go off automated findings and do not require any overlays. As long as the mortgage applicant can meet all the conditions of DU FINDINGS, we can close and fund the mortgage loan. Many of our pre-approvals at Gustan Cho Associates are fully underwritten and issued and signed off by our mortgage underwriters.
Avoiding Last-Minute Mortgage Denial
One of the best ways of avoiding last-minute mortgage denial is for the mortgage lender to qualify and process the mortgage loan applicant initially before submitting the mortgage loan application to underwriting. This means collecting all documentation up front such as the following:
- tax returns
- W-2s, bank statements
- letter of explanations
- bankruptcy paperwork
- foreclosure documents
- divorce decree
- child support paperwork
- other documents
- Collecting documentation is not everything
Importance of Qualified Income
The loan originator or processor should review the tax returns. Make sure there are not a lot of unreimbursed expenses. Substantial unreimbursed business expenses can disqualify the mortgage loan applicant. Review the 60 days bank statements to make sure there are no overdrafts or large unsourced deposits. Do verification of employment to confirm the borrower’s wages, overtime income, and bonus income. Scrutinize the mortgage file so there will be no glitches or questions during the mortgage underwriting process. Submit the file to processing and underwriting. Once the mortgage underwriter issues a conditional loan approval, the file goes back to the mortgage processor. The mortgage processor will start clearing conditions listed on the conditional loan approval.
Common Reasons for Last-Minute Mortgage Denial By Mortgage Underwriters
There are many reasons for last-minute mortgage denial. The mortgage application process starts with the borrower applying for a mortgage loan by completing the mortgage loan application and signing it as well as disclosures.
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Documents Required To Start The Mortgage Process
Documents required for mortgage underwriters:
- two years tax returns
- W-2s, recent paycheck stubs
- 60 days bank statements and other documents that pertain for the mortgage loan underwriter to underwrite and process the mortgage loan application
The mortgage loan underwriter then issues a conditional mortgage loan approval if the borrower meets all underwriting guidelines. A conditional mortgage approval does not guarantee a clear to close.
Clearing Conditions For Clear To Close
Once the mortgage underwriter issues a pre-approval, the borrower will shop for a home. While borrowers are shopping for a home, the pre-approval letter will contain mortgage conditions. The keyword here is conditions. The mortgage underwriter issues a clear to close after clearing all conditions.
Borrowers who cannot clear or meet conditions from conditional approval can get denied. Or the borrower has been late on their rent payments in the past 12 months.
Other issues are the higher debt to income ratios due to higher homeowners insurance, or homeowners association fees, or high unreimbursed expenses. For borrowers counting on overtime income or part-time income or bonus income, a mortgage denial can happen if through the verification of employment the employer states the overtime, part-time, or bonus income is not likely to continue.
What Happens If I Get a Last-Minute Mortgage Denial?
Most lenders will tell borrowers that there is an issue in approving the loan for a clear to close. Lenders will give borrowers a chance to correct the problem before issuing a mortgage denial. Unfortunately, there are other mortgage lenders who will just issue a mortgage loan denial. For example, if the homeowner’s insurance or homeowners association fees are higher than listed on the original mortgage loan application.
Another Common Reason For a Last-Minute Mortgage Denial Due To Not Properly Qualifying Debt-to-Income Ratio
Due to the higher fees you surpass the debt-to-income ratio caps, borrowers can correct it by paying off debts such as paying off credit card balances, paying off a car note, etc. so they can qualify. Borrowers who need to qualify for a mortgage with a national mortgage company with a lender with no lender overlays, please contact us at Gustan Cho Associates at 800-900-8569. Or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
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