This BLOG On How To Avoid Last Minute Mortgage Denial By Mortgage Underwriters Was UPDATED And PUBLISHED On August 26th, 2019
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 The Gustan Cho Team at Loan Cabin Inc. are full credit loan approvals that have been fully underwritten and signed off by our mortgage underwriters
- This is why we close 100% of all of our pre-approvals and we have no last minute mortgage denial
- Many home buyers think that a mortgage loan pre-approval is a done deal and that the mortgage loan will fund and close
Fully Underwritten Mortgage Pre-Approvals Issued By Lenders
This is only the case if the pre-approval has been fully underwritten and signed off by a mortgage underwriter.
- Majority of mortgage loan applicants who get pre-approved will close on their home loan
- 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?
Often times, 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
- However, all of our pre-approvals are fully underwritten and issued and signed off by our mortgage underwriters
Avoiding Last Minute Mortgage Denial
One of the best ways of avoiding the 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 upfront 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
- The mortgage loan originator and/or mortgage processor should review the tax returns to make sure there is not a lot of unreimbursed expenses where it will 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
- Have the underwriter sign the pre-approval letter
Reasons For Last Minute Mortgage Denial
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 disclosures
- The borrower is then requested to submit documents pertaining to the mortgage loan underwriter to review such as the following:
- 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 key word here is conditions
- As long as the mortgage loan borrower can provide all of the conditions stated by the mortgage underwriter then the clear to close is issued
- Some of the reasons for a last-minute mortgage denial are when verification of rent is requested but the borrower cannot provide it
- 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 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 will just issue a mortgage loan denial.
- For example, if the homeowners insurance or homeowners association fees are higher than listed on the original mortgage loan application
- 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 direct lender with no mortgage overlays, please contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at email@example.com. We are available 7 days a week, evenings, weekends, and holidays.