How To Avoid Mortgage Denied By A Bank (Hint: Choose the Right Lender)
This article covers avoiding mortgage denied by a bank.
For borrowers who gotten their mortgage denied by a bank has options. As long as you meet the minimum agency mortgage guidelines, you will qualify for a mortgage by a lender with no lender overlays. Banks have a lot of lender overlays. Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other lenders or had their mortgage denied by a bank. In this article, we will discuss and cover options for borrowers who had mortgage denied by a bank.
Applying For A Mortgage After Getting Mortgage Denied By A Bank
Applying for a mortgage can be nerve-wracking. The lender compares your qualifications to loan program’s requirements and decides if you meet its standards. Being turned down can be devastating. But you should not feel shame or fear. And if you’re turned down, you don’t have to put a bag over your head or anything.
But maybe you just need a better lender.
Mortgage Denied By A Bank: How Does The Mortgage Application Process Work?
There should be no ugly surprises in mortgage lending as long as you and you lender are on the same page. A good loan professional should absolutely know his or her guidelines. After checking your credit report and asking you about your income, assets and debts, this person should know how likely you are to achieve loan approval.
Here is how the mortgage process works:
- Your loan officer or loan processor should briefly interview you for mortgage prequalification.
- The loan officer or processor helps you complete a Form 1003 mortgage application. You’ll also provide documents proving your income and assets — for example, pay stubs or tax returns and bank statements.
- You authorize a credit check and your lender submits your application to an Automated Underwriting System, or AUS.
- The AUS issues a decision. If it’s “Approve/Eligible,” your application and supporting documents go to a human underwriter, who examines your documents and returns a list of closing conditions.
- Any other decision from the AUS means your application needs some work before you can be approved.
Your loan application might have to be underwritten manually. This can happen if the system can’t pull enough information from your credit report, or of your report contains inaccuracies. You may be granted a different loan — for instance, an FHA loan instead of a conventional loan. Or your approved loan amount might be smaller than you wanted. Or you might not be eligible for financing yet but will be in the future.
How Lender Overlays Contribute To Mortgage Denied By A Bank
The official program guidelines for FHA, VA, Fannie Mae and Freddie Mac are not mysterious. They are available to the public online. Unfortunately, you might qualify under the “official” guidelines and still get turned down for a mortgage.
That’s because of a nasty little surprise called the “lender overlay.” Lender overlays are extra underwriting guidelines that most lenders apply on top of the official loan program requirements . Lenders do this because they want to avoid foreclosures. Too many foreclosures, even if lenders abide perfectly by official program guidelines, can cause a lender to lose its approval for that program.
To avoid this, a lender might set its minimum credit score for a 96.5% FHA loan at 620 instead of 580, which is the official minimum. The VA has no minimum credit score requirement, but many lenders set theirs at 620 or higher. The higher minimum credit score is common overlay.
Other overlays include lower debt-to-income ratios and higher reserve requirements. “Reserves” are savings that you’ll have after closing your home loan. These savings are available to pay your mortgage if you experience an interruption in income.
Gustan Cho Associates adds no overlays to FHA, VA, USDA or conventional loans. If the AUS approves your application, you should be able to close your loan with us. One of our Senior Loan Officers at Gustan Cho Associates recently closed on a VA Loan with a 582 credit score with a 60% debt to income ratio.
How Borrower Application Mistakes Cause Mortgage Denied By A Bank
If you provide accurate information and your loan officer understands the program, there should be no surprises. Unfortunately, borrowers are not mortgage experts and can provide inaccurate information. Here are the most common mistakes borrowers make:
- Overstating their income — self-employed applicants often provide their gross income, not their taxable income. Lenders almost always have to use the taxable income unless you apply for a bank statement or other alternative program.
- Overstating their property value when refinancing. Then the home appraisal comes in lower and the loan-to-value does not meet guidelines.
- Overestimating their credit score — even a few points can make the difference between approval and denial. A 2020 study found that 32% of consumers overestimated their credit scores, while just 4% underestimated them.
Those are just the application mistakes. Other errors during escrow can turn an approval into a denial.
Borrower Errors That Turn Approvals Into Denials
Mortgage applicants often think that an AUS approval means they can relax. That would be wrong. Avoid these common mistakes:
- Changing jobs during the application process, especially if the new job pays less or is in a different field. Changing from salaried to self-employed can kill an application as well.
- Applying for new credit during the application process. Inquiries show up when lenders pull a credit report before closing. They will cause the lender to return your application to underwriting or decline it altogether,
- Increasing your balances during the application process. Anything that worsens your financial position can snatch defeat from the jaws of victory and cause your loan to be denied.
- Missing payments, late payments or collections that pop up during the loan process can kill a deal fast.
You need to provide accurate information and then do nothing to change your finances once you have an AUS approval.
What Happens To Your Mortgage Denied By A Bank: Options For Borrowers
Remember that you don’t need to be ashamed or wear a bag on your face. What you do need to do is request your Adverse Action Notice. Lenders must provide this information by law. It’s a written notice that tells you why the lender declined your application. For instance, if its minimum credit score is 620, and your credit score came in at 619, the notice should tell you that you were declined because of your credit score.
You can always ask your loan officer if you did not meet the official guidelines or if you got caught by a lender overlay. If you don’t meet program guidelines, you may have to change programs or improve your position. For instance, if your debt-to-income ratio is too high, you can pay down debts, buy a cheaper home, make a larger down payment or pay points to lower your interest rate and payment.
If you qualify under program guidelines but were caught by an overlay, you just need to find a lender that does not apply overlays. Like Gustan Cho Associates.
Choose a Lender With No Overlays
Gustan Cho Associates is a mortgage company licensed in multiple states with no mortgage overlays on government and conventional loans. Borrowers who need to qualify for mortgage with a lender with zero overlays can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.