In this blog, we will cover and discuss getting a mortgage denied after pre-approval by mortgage underwriters. Qualifying for a residential mortgage loan today is different than it was a few years ago. There is no reason why a mortgage is denied after pre-approval. Over 80% of our clients at Gustan Cho Associates are folks who got a last-minute mortgage loan denial from other lenders due to the lender having overlays.
Getting a mortgage denied after pre-approval causes stress not just to home buyers, but home sellers and their families. Last minute mortgage loan denial also causes stress for loan officers, realtors, and third-party mortgage and real estate professionals.
As long as the loan officer does their due diligence and qualifies borrowers correctly, there is no reason for a mortgage denied after pre-approval. Loan officers need to understand both the federal guidelines as well as their company’s lender overlays.
What Is The Main Reason For Mortgage Denied After Pre-Approval By Underwriters?
The number one reason for a mortgage denied after pre-approval is because loan officers issued pre-approval to borrowers without properly qualifying borrowers. A loan officer should not sign off on a pre-approval letter. All pre-approvals at Gustan Cho Associates are fully underwritten and signed off by our mortgage underwriters.
All of our pre-approval close because they are full credit approvals signed off by our underwriters. All of our mortgage pre-approvals at Gustan Cho Associates are full TBD PROPERTY UNDERWRITING APPROVALS.
Gustan Cho Associates will know whether a borrower will close a loan or not once the borrower orders the credit report and we run the automated underwriting system and get findings.
Gustan Cho Associates has no lender overlays on government and conventional loans. We just go off the findings of the automated underwriting system. Many lenders may have their borrowers get an approve/eligible per automated underwriting system but deny the loan because they have lender overlays that are above and beyond the minimum agency mortgage guidelines. This is the reason we close 100% of all of our pre-approvals.
Qualifying For Home Loans Today
After the historical real estate and credit meltdown of 2008, the whole mortgage industry went through a major overhaul. Fannie Mae, Freddie Mac, FHA, VA, USDA, and portfolio mortgage lenders set up new mortgage lending guidelines. New government minimum mortgage lending guidelines were implemented.
Gustan Cho Associates are mortgage brokers licensed in 48 states including Washington, DC, Puerto Rico, and the U.S. Virgin Islands. We have a network of 210 wholesale mortgage lenders with hundreds of non-QM mortgage loan programs available.
Thousands of mortgage lenders have closed their doors. Many mortgage lenders that survived the Great Recession of 2008 looked for more ways of not to do a loan than trying to make the loan work. Millions of folks were forced to file bankruptcy or go through foreclosure due to the loss of their business or jobs. Entire industries were almost wiped out.
Non-QM and Subprime Mortgage Loan Options
Some industries went extinct due to the Great Recession of 2008. Many mortgage loan programs such as no-doc. DSCR, and stated income mortgage loan programs were completed and shut down. However, NON-QM Loans have come back in full force recently.
No-doc loans, DSCR mortgages, 1099 mortgage loans, stated income mortgages, asset-depletion loans, and bank statement loans are becoming increasingly popular among self-employed borrowers and homebuyers with irregular income.
Bank Statement Mortgages for self-employed borrowers are now very popular and were launched last year. Income, credit, and debt-to-income ratios are the three most important factors in determining whether or not you qualify for a mortgage loan. Just because borrowers do not qualify for a mortgage with one lender does not mean that they do not qualify with a different lender with no mortgage overlays. I will explain to you in a later paragraph why other lenders will qualify borrowers for a mortgage when others cannot.
Minimum Mortgage Lending Guidelines
There are two types of mortgage lending guidelines.
- The first is the minimum mortgage lending guidelines set by Fannie Mae, Freddie Mac, VA, USDA, and HUD ( For FHA loans).
- The second type of mortgage guidelines is called mortgage lender overlay.
Mortgage Overlays are lending guidelines that surpass the minimum federal lending guidelines and vary from mortgage lender to lender. Lenders can set much tougher lending requirements or overlays than the minimum required.
Not All Lenders Have The Same Mortgage Guidelines
Many borrowers are told that they do not qualify for a mortgage. This is not because they do not meet federal minimum mortgage guidelines. Many mortgage borrowers meet the minimum agency mortgage guidelines but may not qualify for a particular lender’s requirements because of the lender’s overlays set by the particular mortgage company. Unfortunately, many lenders tell borrowers that they do not qualify for a home loan not due to the federal minimum guidelines but because of their own mortgage overlays.
What Are Lender Overlays By Mortgage Companies?
Borrowers told they do not qualify for a mortgage by a particular lender, find out why. If it is because of their overlays, then there are lenders with no overlays like Gustan Cho Associates. Is it because not meeting federal guidelines or is it because of the mortgage company’s internal overlays?
Federal Guidelines Compared To Lender Overlays
We will use a few examples of why so many borrowers are told they do not qualify for home loans.
Minimum credit score requirement for FHA Loan
Minimum credit scores to qualify for a 3.5% down payment. FHA minimum credit score requirement under federal guidelines imposed by HUD is 580. Many lenders, especially banks, require a minimum credit score of 640 even though HUD only requires 580. This is due to their overlays on credit scores. If borrowers are told they do not qualify for a mortgage due to having credit scores under 640, then go elsewhere where lenders do not have overlays on credit scores. There are plenty of mortgage companies with lender overlays that will welcome under 600 credit score borrowers.
HUD Debt-To-Income Ratio Guidelines on FHA Loans
The maximum debt-to-income ratios allowed by HUD to get approve/eligible per AUS on FHA loans is 46.9% front-end DTI and 56.9% back-end DTI. Many lenders will have overlays on debt-to-income ratios. Many lenders, especially banks, will cap the back-end debt-to-income ratios to 45% DTI. Some will go as low as 43% or lower depending on the mortgage lender. Borrowers told they do not qualify for a mortgage due to high debt-to-income ratios, and go elsewhere. There are plenty of lenders with no overlays that will be ecstatic to have the business
HUD Guidelines on Collection Accounts on FHA Loans
HUD does not require borrowers to pay off the old collection and charged-off accounts. Borrowers can still qualify for FHA Loans without having to pay off old collection accounts with balances. However, many lenders will require that collection and charged-off accounts be paid
However, HUD does count 5% of the unpaid collection balance as a monthly liability. It will count as a monthly expense when calculating debt-to-income ratios. This is only on non-medical collection accounts with balances greater than $2,000. Medical collection accounts with credit balances are exempt from this rule.
Borrowers are told they need to pay off all of their collection account balances or get denied for a mortgage loan due to unpaid collection accounts, then go elsewhere. Paying outstanding collections and charged-off accounts is not required by HUD. There are banks where that will not even look at borrowers with collection accounts, whether paid or unpaid, in the previous 4 years
The minimum credit score requirement to qualify for a conventional loan is 620. However, many lenders will not accept any conventional mortgage loan applicants with credit scores under 680 as part of their lender overlays.
Gaps in Employment
Many lenders, especially banks and credit unions, will require borrowers to be employed with the same company for at least two years. They also do not allow gaps in employment in the past two years. This is not a Fannie Mae nor a HUD mortgage lending guideline. Borrowers can have gaps in employment and still qualify for a mortgage loan.
For borrowers who have been unemployed for six months or less and get a new job, then 30-day paycheck stubs will be required in order for you to close a mortgage loan. Verification of employment will also be required to make sure that the likelihood of continuous employment is likely.
Overlays On Gaps In Employment
One of the big reasons for mortgage denial after pre-approval by some lenders is that they have overlays in employment gaps. Some lenders will average two years of income when many times it is not necessary. Other lenders do not allow gaps in employment by borrowers: If borrowers have been unemployed or not working for six or more months, federal mortgage guidelines require that they be employed full-time for a period of six or more months before they can qualify.
How Long Is Too Long of a Gap in Employment?
If you took two or three months between jobs, it’s usually not considered an employment gap but rather a job searching period. However, stretch that period to nine or ten months and most employers would consider that a full-fledged employment gap. Can I get a job after 5 year gap? Though getting a job after a long gap and no experience is difficult but not impossible. You can attend walk-in interviews, some companies don’t consider the year of passing. If you have good skills (which I am not sure you would have after such a long gap), you can start working as a freelancer.
They can have been out of work for a year or more. Homebuyers can qualify for a mortgage as long as they have been employed in a full-time job for 6 or more months on a new job with a prior extended gap in employment.
Can You Have Multiple Jobs in The Past Two Years and Qualify For a Mortgage?
Homebuyers will be eligible to qualify for a mortgage loan with multiple gaps in employment in the past two years. All mortgage applicant needs to provide a 2-year work history. If a mortgage loan applicant has been employed in a new job for six months and has been unemployed for two years, they need to provide one and one-half years of job history prior to the time before their unemployment status started.
Borrowers can have a gap in employment in the past two years to qualify for a mortgage. Many borrowers are under the impression they need to be on the same job for the past two years. This is not the case. The mortgage lender needs a two-year job history. It does not need to be a job history with no gaps. A two-year residential history is required as well.
Over 80% of our borrowers at Gustan Cho Associates are folks who could not qualify at other lenders or have gotten a mortgage denial after pre-approval. We have no overlays on government and conventional loans. All of our pre-approvals are full credit loan commitments that are fully underwritten and signed off by our mortgage underwriters.
Mortgage Lenders For Bad Credit and Manual Underwriting
We are experts in helping borrowers with under 600 credit scores and manual underwriting. Borrowers who have gotten mortgage denial after pre-approval can easily transfer their FHA and/or VA Home Appraisals so they are not stuck with another appraisal fee. Borrowers who have gotten their Mortgage Denied After Pre-Approval, please contact us so we can help. There should be no reason for a Mortgage Denied After Pre-Approval. The main reason for a Mortgage Denied After Pre-Approval is due to the loan officer not properly qualifying the borrower initially.
This BLOG On Mortgage Denied After Pre-Approval Was UPDATED on March 11th, 2023
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March 11, 2023 - 9 min read