This BLOG On Mortgage Denial By Underwriter And How To Take Next Steps Was UPDATED On July 10th, 2019
There should be no mortgage denial if the borrower was properly qualified for a home loan. Borrowers need to be very cautious with their finances and credit during the mortgage loan approval process and not bounce checks or apply for credit.
- The number one reason for mortgage denial is due to the fact that the borrower was not properly qualified
- Source of a down payment should be confirmed prior to issuance of the pre-approval letter
- The pre-approval stage of the mortgage process is the most important part
- There is no reason why a pre-approved borrower should get a mortgage denial if the borrower was properly qualified
Importance Of Pre-Approval Letter
Loan officers should do the following prior to issuing a pre-approval letter:
- Make sure the mortgage loan application, commonly known as 1003, is accurate and complete
- Qualify the borrower by asking them questions and not just assuming
- For example, credit reports are not fully accurate
- There are important items that may not be reporting on a credit report such as judgments and tax liens
- Public records such as bankruptcies, foreclosures, short sales, judgments, tax liens will be discovered during the mortgage process when the lender does a third-party national public records search
- Not all public records are listed on credit reports
- Check and review all credit inquiries
- Make sure that borrower has not incurred any new debt that can be discovered during the mortgage underwriting process
- The above is important, especially with borrowers with higher debt to income ratios
- Thoroughly review tax returns
- Thoroughly review the credit report and make sure there are no credit disputes
- Credit disputes during the mortgage process are not permitted with the exception of medical collections and non-medical collections with zero balances
- Loan officers should run automated underwriting system prior to issuance of pre-approval
- Many home buyers go to their local bank where they do their banking for a mortgage
- Many think that their bank is their only option
- Then they get the bad news that their mortgage application got denied
Finding Reason For Mortgage Denial
Most banks have higher lending guidelines when it comes to residential mortgages than the actual mortgage lending guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac. The higher lending requirements are called lender overlays. It is not against the law for a mortgage lender to require higher credit scores, lower debt to income ratios, and collections/charged off accounts to be paid off. This holds true even though federal mortgage guidelines do not require it.
- Most banks want a minimum of a 640 credit score or higher with no late payment histories in the past 24 months
- HUD Guidelines only require 580 credit scores for 3.5% down payment home purchases
- Most banks will not even process a mortgage application on borrowers who have open collection accounts or any other derogatory credit items
- Under HUD Guidelines, collections and charged off accounts do not have to be paid to qualify for FHA Loans
- Banks and most lenders do not have the personnel nor resources to help borrowers with bad credit improve the borrower’s credit score
- Most banks will either approve it or deny a mortgage applicant and will not go to the trouble of doing a rapid rescore and advise them on credit
- Members of The Gustan Cho Team at Loan Cabin Inc. will help every home buyer who needs help and works with them until they qualify
Options After Mortgage Denial
There are certain things borrowers who got mortgage denial should do.
- Find out the reason for the mortgage denial.
- Was it because of not being properly qualified?
- Was it because the borrower did not meet guidelines or due to lender overlays?
- Was it borrower’s fault where they had overdrafts in checking account or purchased high ticket item?
- Just because a borrower got denied from one lender does not mean that they do not qualify with other lenders
- A mortgage broker represents several lenders
- They can help you to connect with a lender that will be able to help you
- Lenders who have no overlays can help borrowers who have credit scores under 600, have open collections, unsatisfied judgments, tax liens, bankruptcies, and foreclosure
- If the borrower does not qualify at the present time, we will help them get qualified in the near future
- We help all home buyers in need of help
Home buyers who need our help after they have a mortgage denial by other lenders, please contact us at 262-716-8151 or text us for faster response. Or email us at email@example.com .