What Is A Pre-Approval?
Many home buyers think that a mortgage loan pre-approval is a done deal and that the mortgage loan will fund and close. Majority of mortgage loan applicants who get pre-approved will close on their home loan, however, a pre-approval letter is just a letter of intent that the mortgage lender feels confident that the mortgage loan applicant is qualified and meets mortgage lending guidelines and the lender is willing to proceed with the mortgage approval process.
When Is The Pre-Approval Letter Issued?
A pre-approval is issued 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, and runs the mortgage application and credit report through the Automated Underwriting System. If the findings of the automated approval renders an approve/eligible, the mortgage applicant is pre-approved as long as the mortgage loan applicant can satisfy the conditions of the automated approval findings. Such conditions may be to provide verification of rent, remove credit disputes, and other conditions. For mortgage 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.
Avoiding Last Minute Mortgage Denial
One of the best way of avoiding a 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 documentions upfront such as tax returns, W-2s, bank statements, letter of explanations, bankruptcy paperwork, foreclosure documents, divorce decree, child support paperwork, and other documents. Collecting documentions is not everything. The mortgage loan originator and/or mortgage loan processor should review the tax returns to make sure there is not alot 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 a verification of employment to confirm the borrower’s wages, overtime income, and bonus income, and scrutinize the mortgage file so there will be no glitches or questions during the mortgage underwriting process.
Reasons For Last Minute Mortgage Denial
There are many reasons for a 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 two years tax returns, W-2s, recent paycheck stubs, 60 days bank statements and other documents that pertains 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. 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 of a last minute mortgage denial is when a verification of rent is requested but the mortgage loan borrower cannot provide it or the borrower has been late on their rent payments in the past 12 months. Other issues are higher debt to income ratios due to higher homeowners insurance, or homeowners association fees or high unreimbursed expenses. For mortgage loan 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 mortgage lenders will tell you that there is an issue in approving the loan for a clear to close and will give you a chance to correct the problem before issuing you a mortgage denial while 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 and due to the higher fees you surpass the debt to income ratio caps, you can correct it by paying off your debts such as paying off your credit card balances, paying off a car note, etc. so you can qualify.