In this article, we will cover and discuss what to do if you get mortgage denial after conditional approval. There are multiple processes in the home loan application and approval process. Whether home purchase or refinance borrower, the mortgage application process is the same. Before mortgage applicants sign any paperwork, the loan officer will have applicants complete a 4-page application, also referred to as 1003. The loan officer will then run credit and review credit scores and credit reports. He or she will then run the application and credit report through the Automated Underwriting System for automated approval.
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Homebuyer’s Guide on What To Do After Getting Mortgage Denial After Conditional Approval Borrowers Guide
With an automated approval renders an automated approval after analyzing the following documents:
- two years of tax returns
- two years W-2s
- recent paycheck stubs
- 60 days bank statements
- other documentations
- With AUS approval, the file will be submitted to the processing department of the lender and a processor assigned
The Importance of Complete and Legible Documents To Avoid Delays in the Mortgage Process
One of the most important ways of delaying the mortgage loan closing date or getting a loan approval is to make sure all documents required by the mortgage underwriter is legible with no missing pages. The mortgage processor makes sure that all pages of every document provided are complete. The file is submitted to the underwriting department. A mortgage underwriter gets assigned to the file
Mortgage Denial After Conditional Approval? Over 75% of our borrowers are folks who could not qualify at other lenders
A loan underwriter will be assigned to your mortgage file.
- The role of the underwriter is to make sure the loan applicant meets all guidelines and has the ability to repay the monthly payments of the loan.
The role of the underwriter is to review the borrower’s financials:
- tax returns
- employment history
- prior bad credit
- prior bankruptcies
- prior foreclosures
- prior deed in lieu of foreclosure
- prior short sales
- prior late payments
- recent credit inquiries
- bank statements
- other documents that pertain to borrowers
Underwriters will also review other documents that may be applicable as the following:
- divorce decrees
- child support paperwork
- alimony paperwork
- any other documents
Once the underwriter feels comfortable borrower meets all minimum lending guidelines, the underwriter will issue a conditional approval.
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What Is Conditional Approval?
Conditional approval is issued by an underwriter once the borrower has met all the conditions for the loan program applied. Conditional approval will convert to a loan commitment once the conditions have been cleared. The processor will submit the file for a clear to close once the borrower signs the loan commitment and turns in all final conditions for a CTC.
Clear To Close By the Mortgage Underwriter
A clear to close is issued when the underwriter has signed off all final conditions on the loan. Once a clear to close is issued, the file is now ready to fund and docs are prepared by the closing department. The closing department works closely with the title company in getting the final Closing Disclosure prepared.
The Closing Disclosure Prior to Closing
Once the final CD, closing disclosure, has been prepared and signed off, the closing date is scheduled. Due to TRID, a home loan cannot close until three days after the clear to close and disclosures of the CD. There are many times when borrowers get mortgage denial after conditional approval and sometimes a denial after a CTC.
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Mortgage Denial After Conditional Approval
As mentioned above, just because you get conditional approval does not mean that you are guaranteed to close on your home loan. After borrowers are issued a conditional approval, they need to provide the conditions underwriter requests. Examples of conditions may be the following:
- verification of rent
- verification of employment
- updated bank statements
- letters of explanations
- conditions on appraisals
- gift letters
Or more documents that are needed such as the following:
- bankruptcy papers
- divorce decree
- foreclosure verification on recorded dates
- and other items
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Mortgage Denial After Conditional Approval: Buying High Ticket Items During Mortgage Process
One of the biggest reasons why there is a loan denial after the underwriter issues a conditional loan approval is because the borrower purchases high ticket merchandise with credit. The home buying process can be very exciting. Many homebuyers are excited about decorating their new homes with new furniture. However, under no circumstances should you apply for credit during the mortgage process. Do not spend money from your bank account that has been earmarked as verified assets for the down payment and closing costs of your home purchase.
Dangers in Buying High Ticket Items During The Mortgage Process
Many furniture and/or appliance stores may offer zero interest and no payments for one year if you purchase at their stores. However, this is not good when you are going through the mortgage process. The mortgage underwriter will pull credit throughout the mortgage process. Just before issuing a clear to close, the mortgage underwriter will do a soft credit pull. Any credit inquiries will show up on your credit report. The mortgage underwriter will want to know about the credit inquiry, the outcome of the credit inquiry how much debt you have incurred, and what the monthly payment is.
Mortgage Denial After Conditional Approval: Case Scenario
Examples of reasons for mortgage denial after conditional approval are when the mortgage underwriter pulls credit prior to issuing a clear to close. If the mortgage underwriter sees a credit inquiry, this will create a red flag and ask about the inquiry. The underwriter will want to know if the borrower got a new credit. If the underwriter discovers the borrower has made a major purchase this can create a problem for borrowers with higher debt to income ratios. The new high ticket item purchase can offset the maximum debt to income ratio. If the borrower’s DTI is over the maximum cap allowed, the underwriter can kick the file back to the mortgage processor and loan officer and suspend the file. The file can be on suspense status until the debt to income ratios are back in line with the maximum DTI allowed.
Reasons For Mortgage Denial After Conditional Approval
Other examples of mortgage denial after conditional approval are when the underwriter needs to do a verbal verification of employment and find out that the borrower just quit his or her job. The borrower needs to wait 30 days on their new job and provide 30 days paycheck stubs before the mortgage underwriter can issue a clear to close if the borrower quit and started a new job. Underwriters can requests verification of rent. However, if the borrower cannot provide 12 months of canceled checks because some months the borrower has paid in cash, the rental verification is null and void. All of the above examples can be reasons for mortgage denial after conditional approval.
Qualifying For A Mortgage With A Lender With No Overlays
Over 75% of our borrowers at Gustan Cho Associates are folks who either could not qualify at other lenders due to their lender overlays and/or due to a last-minute mortgage loan denial. Gustan Cho Associates has no lender overlays on government and/or conventional loans. If you need to qualify for a home mortgage with a lender with no lender overlays on government and/or conventional loans, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.
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Options For Homebuyers If The Underwriter Issued A Mortgage Denial After Conditional Approval
Once you have a preapproval letter or conditional mortgage approval, can your lender still deny your loan application? It’s not common, but it does happen. Borrower profiles — credit scores, jobs, and assets — can change during the loan process and that can impact loan approvals. Program guidelines can change. Underwriters can make errors. You can avoid losing your loan approval by following some simple guidelines.
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Prequalification is NOT a Conditional Approval
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Many lenders and real estate agents use the terms mortgage prequalification and mortgage preapproval interchangeably, but they don’t mean the same thing. A prequalification generally means that the lender has asked the borrower about his or her income, down payment, other assets, and credit. A prequalification letter states that the borrower “should” be able to obtain a loan based on the information provided. However, the information has not been verified.
Loan Officers Not Properly Qualifying Borrowers Prior To Issuing Pre-Approval Is Main Reason For Mortgage Denial After Conditional Approval
Often, lenders issue prequalification letters without pulling a credit report or seeing any documents. Mortgage preapproval or conditional approval is much more valuable. To get a preapproval, you must apply for a mortgage and supply any documents and information the underwriter wants. The underwriter examines these things and issues a conditional approval or mortgage preapproval letter. Sometimes, borrowers believe that they have a conditional approval or mortgage preapproval when what they really have is just a prequalification.
Related: What Is a Conditional Mortgage Approval?
Automated Underwriting Systems (AUS)
When you apply for mortgage preapproval, your loan officer takes your application information and runs it through an automated underwriting system (AUS). Fannie Mae’s version of AUS is Desktop Underwriter DU. Freddie Mac is Loan Prospector LP. Both are similar and can render underwriting decisions in minutes after pulling your credit report and analyzing your information. Lenders use these systems to underwrite government-backed loans as well as conventional loans. You’ll get one of four recommendations. “Approve/eligible,” means you are eligible for the program and you probably qualify for financing.
Conditions from the Automated Underwriting System
When you get an approve/eligible decision, you’ll also receive a list of items that must be provided to close your loan. Examples include pay stubs that show sufficient income, bank statements, or a home appraisal that supports the home sales price. As long as your documents support the information on your application, you should be able to close. “Refer” means the file must go through manual underwriting. Either you’re borderline risky or the system doesn’t have enough information to render a decision, or there is invalid information or insufficient information on your credit report.
What Does the Automated Findings with Refer with Caution Mean?
“Refer with caution” means that based on the information submitted on your application and in your credit report, you don’t qualify for financing. If the information is incorrect, a human underwriter may be able to approve your loan. In most cases, though, a refer with caution means the software declined your application. Rarely, you’ll get an “out of scope” decision. That means the AUS cannot underwrite the product, mortgage, or borrower. In some cases, you might qualify with manual underwriting.
When an AUS Approval Is Not a Real Approval
Automated underwriting systems can determine if you qualify for financing based on official program guidelines. However, most mortgage lenders add more restrictive requirements to at least some of their programs. For instance, HUD, the parent of FHA, allows mortgage approvals with credit scores as low as 500 and 10% down, or 580 with 3.5% down. But many lenders require higher minimum credit scores and will decline a borrower who meets the agency’s official minimum guidelines.
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Automated Findings of Approve/Eligible per the Automated Underwriting System (AUS)
An AUS approval is also not a real approval unless your documents support the information listed on your loan application. If you say that you earn $5,000 per month but your paystubs show $4,000 per month income, you don’t have approval. If the software asks for a bank statement showing that your down payment is coming from savings, and you never get around to providing that statement, you don’t have approval. At Gustan Cho Associates, there are no overlays. An AUS approval is almost always a real approval as long as you meet the underwriting conditions and nothing changes in your file.
15 Day Closing If You Got a Mortgage Denial After Conditional Approval From Another Lender
What Is a Conditional Loan Approval?
Conditional loan approval means your lender expects to close your loan once you meet all of the conditions listed on your approval letter. Mortgage loan conditions can include:
- Updated bank statements
- Letter of explanation
- Verification of rent, employment, or down payment
- Divorce decree
- Bankruptcy filing
- Self-employment documents
- Satisfactory home appraisal
A conditional loan is a real approval as long as you submit the required conditions and the underwriter signs off. Once your conditions are in and accepted, the underwriter can issue a clear to close. That means the mortgage underwriter certifies that the loan can be funded.
Related: Conditional Mortgage Approval: Clear to Close
Mortgage Derailed After Conditional Approval: What Just Happened?!
Most of the time, a conditional approval means your loan will close. But some events can cause your approval to evaporate faster than spilled beer in Death Valley. Your income, credit rating, debts, down payment, or other important factor changes. You decide on a different mortgage program and have to start over.
Understanding Mortgage Conditions During the Mortgage Process
One condition comes in and opens up more questions — for instance, your bank statement shows a huge deposit or a bunch of bounced checks that require additional explanation. You fail to provide the conditions requested. The lender changes or cancels the loan program. It’s best to change NOTHING once you have approval. If you say that your down payment will come from savings, don’t decide to borrow it instead. Don’t apply for new credit or increase your debts until after you close your loan. And pay all bills on time to protect your credit rating.
Can I Reapply for a Mortgage if I Got Mortgage Denial After Conditional Approval?
Over 75% of successful borrowers at Gustan Cho Associates could not qualify with another lender or were denied by another lender after being approved. There is no shame in being denied a mortgage. It usually just means you were not a great fit for the lender you chose. So apply with us. It only takes a few minutes. Gustan Cho Associates has no lender overlays. We are experts in creative financing and can often help borrowers who have a hard time qualifying for a mortgage elsewhere.
Minimum Credit Score Requirements to Qualify For Mortgage
The minimum credit score to qualify for a 3.5% down payment FHA loan is 580. There is no minimum credit score requirement or debt to income ratio cap for VA home loans. We at Gustan Cho Associates follow standard AUS findings, with zero overlays on FHA loans, VA loans, USDA loans, and conventional loans. To get a fast pre-approval, contact us at Gustan Cho Associates. Start the qualification and pre-approval by clicking this icon: GET PRE-APPROVED NOW or email us at email@example.com or call us at 800-900-8569. Or Text us for a faster response. Or email us at firstname.lastname@example.org. Our support and licensed personnel are available 7 days a week, holidays included.
Prequalify for your mortgage right now
April 16, 2022 - 10 min read