By Gustan Cho
If you are a first time home buyer or a seasoned home buyer, you need to choose a mortgage lender to get a residential mortgage loan. There are various types of mortgage lenders you can go to such as banks, credit unions, mortgage bankers, or mortgage brokers. First time home buyers need to educate themselves in mortgage basics. Many first time home buyers go to their local banks and apply for a residential mortgage loan. Some get approved while others get a loan denial. Just because one mortgage lender gives you a loan denial for a residential mortgage loan does not mean that you do not qualify for a mortgage loan. Unfortunately, many first time home buyers who get a loan denial for a residential mortgage loan think they cannot get a mortgage loan approval elsewhere. Unfortunately, many bank mortgage loan officers do not recommend first time home buyers who get a loan denial for a residential mortgage loan to other mortgage lenders. The banker normally just tells them that they do not qualify due to certain reasons and does not give them any corrective measures where their loan denial will turn to a loan approval. Every mortgage company, banks, credit unions, and mortgage bankers have their own system on how they accept mortgage loan applications, how they process them, and how they underwrite them. There are mortgage lenders who are much more lenient than others. For example, most bankers and credit unions do not allow you to correct a problem with high debt to income ratios. For example, if your debt to income ratios exceed the maximum allowed by the mortgage lender, some lenders will deny the mortgage loan application because your exceeded the maximum allowed debt to income ratio cap. Other mortgage lenders will not deny the loan application but will give you a chance to lower your debt to income ratios by either paying down credit cards or paying off a debt or even asking you if you can get a non-occupant co-borrower.
Reasons Why Mortgage Lenders Issue Loan Denial
Over half the residential mortgage loan borrowers I have are mortgage loan borrowers who could not qualify at banks or other mortgage bankers or have gotten a loan denial. Every bank has their own mortgage lending guidelines on top of FHA or Fannie Mae’s minimum mortgage lending guidelines and these internal mortgage lending guidelines are called mortgage lender overlays. For example, the minimum mortgage lending guidelines by the Federal Housing Administration to qualify for a 3.5% down payment FHA insured mortgage loan is for a mortgage loan borrower to have a 580 FICO credit score. However, a bank may have their own mortgage lending guideline that requires a residential mortgage loan borrower to have a 640 FICO credit score. A 639 FICO credit score will not qualify a residential mortgage loan borrower for a mortgage loan with a bank that has a 640 FICO score. Another example is that a bank may require collection accounts to be paid off. FHA mortgage lending guidelines does not require a mortgage loan borrower to have unsatisfied derogatory credit items to be paid off. A bank may require that the mortgage loan borrower need verification of rent. FHA and/or Fannie Mae guidelines does not require rental verification unless the FINDING on the Automated Underwriting System states so. Rental verification can be a mandatory mortgage lender overlay by a certain bank. Most banks do not allow for a mortgage loan borrower to have any late payments or derogatory credit after the mortgage loan borrower has had a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale. Again, a late payment or derogatory credit after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale is allowed by FHA and/or Fannie Mae/Freddie Mac mortgage lending guidelines. A bank may require a cap on debt to income ratios such as no greater than a 45% debt to income ratios. The maximum FHA back to end debt to income ratio cap on FHA insured mortgage loans is capped at 56.9%. Most banks do not do manual underwrites. If you are not getting an approve/eligible per DU FINDINGS or LP FINDINGS, you need to seek mortgage lenders that do entertain manual underwriting on residential mortgage loans. A bank may disqualify you for having one or two overdrafts in your bank statements over the past 12 months. This can be overlooked by more aggressive mortgage lenders. If you are seeking a home loan with bad credit, a bank may not be the best choice for you.
Many folks are members of credit unions. Again, as with banks, credit unions do have many mortgage lender overlays. For those with great credit and income and who are members of credit unions may want to seek to see if their credit unions can offer them a residential mortgage loan. Credit unions take care of their members who qualify with their mortgage lending guidelines and can offer better terms and rates for their members; better terms and rates than your local bank. Advantages of credit unions is that it can be a one stop shop for its credit union members. Credit unions not just offer mortgage loans but car loans, savings and checking accounts, and credit card accounts. They are similar to banks but are more lenient when it comes to mortgage lending guidelines and have better terms and rates than banks do. Many credit unions do not offer FHA, VA, USDA, mortgage loans.
Mortgage bankers are an excellent source for a first time home buyer to see if they qualify for a residential mortgage loan. Mortgage bankers use their own money or a warehouse line of credit to fund mortgage loans to consumers and sell their mortgage loans after they are done to originating to the secondary market. Again, mortgage bankers have their own mortgage lending guidelines. Mortgage bankers are less strict than banks and credit unions. Most banks and credit unions may require credit scores between 640 FICO and 680 FICO. There are many mortgage bankers that will qualify residential mortgage loan borrowers with credit scores as low as 620 FICO. Each mortgage banker have their own mortgage lending guidelines and just because you get denied by one mortgage banker does not mean that you cannot qualify with a different mortgage banker. There are mortgage bankers who are also mortgage brokers. This is the best of both worlds. If you are seeking a home loan with bad credit and a mortgage banker cannot help you because you do not meet their mortgage banking credit lending guidelines due to their mortgage lender overlays, your mortgage banker can broker your mortgage loan application to a wholesale mortgage lender. Only a few mortgage bankers are both mortgage bankers and mortgage brokers.
What Are Mortgage Brokers?
If you are a first time home buyer or a seasoned home buyer seeking a home loan with bad credit, hiring an aggressive mortgage broker specializing originating home loan with bad credit will be your best bet. Mortgage brokers are contracted with dozens of residential wholesale mortgage lenders. Mortgage brokers also have wholesale mortgage lenders that do not have mortgage lender overlays. I am both a mortgage banker and a mortgage broker. Most of our investors require a minimum of a 620 FICO credit score in order for us to bank the mortgage loan. Deals that I cannot do as a mortgage banker, I broker these deals out to wholesale mortgage lenders. As a mortgage broker, I have several wholesale mortgage lender who do not have mortgage lender overlays. As long as I can get an approve/eligible per DU FINDING and/or LP FINDINGS, I can get the mortgage loan application approved and closed in time. Why have multiple wholesale mortgage lenders with no mortgage lender overlays? The answer to this question is due to terms and rates. Even though I can get an approve/eligible per DU FINDINGS and/or LP FINDINGS mortgage loan application approved and closed, not all home loan with bad credit applications are alike. For those seeking a home loan with bad credit but have compensating factors, the mortgage loan borrower will get better terms and rates.