This Article Is About The Reasons For Home Loan Denial By Mortgage Underwriters
There should be no Reasons For Home Loan Denial. All loans that are pre-approved should not just close, but close on time. The only Reasons For Home Loan Denial is due to the fact that the loan officer did not properly qualify the borrower prior to issuing a pre-approval letter. Mortgage loan originators should not issue a pre-approval letter unless they are 100% sure that the borrower fully meets not just the mortgage guidelines but also their lender overlays.
Most lenders have overlays. Just because the borrower meets all mortgage guidelines does not mean that they can close on their home loan. Lender overlays are lending requirements that are above and beyond those of FHA, VA, USDA, Fannie Mae, and Freddie Mac. Other Reasons For Home Loan Denial are due to borrower’s actions which we will discuss in this article.
In this article, we will discuss and cover the main reasons for a last-minute loan denial as well as how to avoid stress during the mortgage process.
Main Reasons For Home Loan Denial
Here are steps to take to avoid home loan denials and/or stress during mortgage process :
- Mortgage companies are mandated by law to tell mortgage applicants Reasons For Home Loan Denial if they have gotten denied for a home loan under the Equal Credit Opportunity Act
- The two types of information that needs to be disclosed with the denial letter are the reason why borrower and/or borrowers were denied and the name or names of the credit bureaus they used in getting the credit report
The name and address and contact information of the credit reporting agency need to be disclosed to the borrower.
Understanding Reasons For Home Loan Denial
Borrowers who do not fully understand the Reasons For Home Loan Denial need to contact the mortgage company to further explain the reason until they understand. Just because borrowers got denied by one lender does not mean that they cannot qualify with other lenders. Over 75% of our borrowers are folks who either got denied by other lenders or were going through major stress during the mortgage process. As mentioned earlier, the main Reasons For Home Loan Denial is due to the loan officer not properly qualifying borrowers and not knowing mortgage guidelines and their lender overlays.
Loan Denial Due To Overlays
Overlays are mortgage guidelines that are above and beyond those of the minimum lending requirements by FHA, VA, USDA, Fannie/Freddie.
- Just because FHA requires 580 credit scores for a 3.5% FHA Loan does not mean that a borrower will qualify with all lenders
- Many lenders have overlays on credit score requirements on FHA Loans
- They may require a 620 or 640 credit score even though HUD Guidelines state 580 credit
- This higher credit score requirement to qualify for FHA Loans is called Overlays on behalf of the individual lender
A loan officer not knowing their lender overlay fully can be a disaster waiting to happen.
Typical Mortgage Overlays By Lenders
There are lender overlays on the following:
- Credit Scores: Minimum credit score for FHA is 580
- Most lenders will have overlays on credit scores and require higher scores such as 620 to 640
- This is called overlays on credit scores
- Debt To Income Ratio: FHA caps DTI at 56.9% DTI
- However, most lenders will have overlays on debt to income ratios where they will cap it between 45% to 50%
Verification Of Rent:
- Many lenders will require VOR even though AUS does not require it
- Borrowers do not have to pay off outstanding collections and charge off accounts with balances
- However, many lenders will have lender overlays on collections and charge off accounts and require borrowers to pay it off even though HUD Guidelines does not require them to
Consumers may be denied credit for a home loan or any other loan for various reasons.
This includes not meeting the creditor’s minimum income requirement, having a higher debt to income ratio, or some other reason required by agency guidelines.
Improper Income Qualification Is Other Reasons For Home Loan Denial
Income and credit are the two most important factors in qualifying for a mortgage. Borrowers with higher debt-to-income ratios need to make sure that the income is calculated correctly. Loan officers should always get second opinions with borrowers who have higher debt to income ratios or self-employed borrowers so they have income calculated corrected. Borrowers with self-employed income, part-time income, bonus income, overtime income, and/or other types of non-traditional income are at risk for a last-minute loan denial if income is not properly qualified.
Besides income, loan officers need to make sure that borrowers have enough cash to close and that the down payment and/or closing costs can be sourced.
Loan To Value Is Other Reasons For Home Loan Denial
There are down payment requirements on home purchases and borrowers whose home appraisal does not appraise out are at risk for a loan denial if the property does not appraise out.
In the event of a lower than the expected appraisal, here are the solutions homebuyers can explore to save the deal:
- Negotiating with the sellers to lower the sales price to the appraised value
- Coming up with additional funds to cover the difference between the home appraised value and the purchase price of the property
- Do an appraisal rebuttal if they have solid facts that similar homes have sold and closed at higher values
In cases where the mortgage got denied due to credit reflected on the credit report, borrowers are entitled to receive a copy of their credit report at no cost as long as it is requested within 60 days of the denial letter.
Credit Is Other Reasons For Home Loan Denial
Loan officers will pull a tri-merger credit report on borrowers and review not just the credit scores but the overall credit report and payment history.
Here is what loan officers should look for during the pre-approval process and prior to issuing a pre-approval letter:
- Check to see if borrower’s meet the minimum credit score requirement
- See if borrowers were timely on all of their payments in the past 12 months
- Make sure that bankruptcies and foreclosures meet the mandatory waiting periods
- Check for any judgments and tax liens
- Collections and charge-offs do not have to pay off
- However, credit disputes will halt the mortgage process except for medical collection accounts, where disputes on medical collections are exempt
- Make sure there are no credit disputes on non-medical collections and charge offs
The Team at Gustan Cho Associates specializes in originating and funding mortgage loans with no lender overlays. Just because borrowers do not qualify with one lender does not mean that they will not qualify with another. Borrowers who were told they do not qualify, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at email@example.com.