What Are The Reasons For Mortgage Loan Denial
Reasons For Mortgage Loan Denial
A mortgage loan denial is when a mortgage loan underwriter denies the mortgage loan application because the mortgage loan borrower does not either meet the federal minimum mortgage lending guidelines or the mortgage lender overlays. There are reasons for mortgage loan denial which can be avoided. Every mortgage loan program has its own minimum mortgage lending guidelines set by the loan program. For example, HUD sets all lending guidelines for FHA Loans. The Department of Veteran Affairs creates and implements mortgage lending guidelines for VA Loans. Rural Development sets standards and lending guidelines for USDA Loans. Fannie Mae and Freddie Mac sets mortgage lending guidelines for Conventional Loans.
Besides federal minimum lending guidelines, each individual mortgage lender can have their own lending requirements and lending guidelines that are higher standards than the federal minimum lending guidelines which are called mortgage lender overlays. For example, to qualify for a 3.5% down payment FHA Loan, FHA minimum credit score requirements are 580 FICO. However, banks and mortgage companies may have FHA Lender Overlays where they may require a minimum credit score of 640 FICO which is substantially higher than FHA’s 580 FICO credit scores. This is perfectly legal and very common among mortgage lenders where their own mortgage lending requirements, called mortgage lender overlays, are substantially higher than those required by FHA. Another common lender overlays are DTI Overlays. FHA allows up to a 56.9% debt to income ratio for borrowers with at least a 620 FICO credit score. However, most banks and many mortgage lenders have mortgage lender overlays on debt to income ratios on FHA Loans where they may cap the debt to income ratios to a maximum of 45% DTI. Overlays on collection accounts are other common mortgage lender overlays where FHA does not require that mortgage loan borrowers to pay off outstanding collection accounts and charge off accounts in order to qualify for FHA Loans. Many banks and mortgage lenders have mortgage lender overlays on collection accounts and charge off accounts where they require that the mortgage loan borrower have all collection accounts paid off and have a zero balance.
Most Common Reasons For Mortgage Loan Denial
The most common reasons for mortgage loan denial is due because the mortgage loan originator has not pre-qualified the mortgage loan borrower. Mortgage loan officers need to make sure that the loan borrower is qualified with regards to credit, credit scores, payment history, income, and waiting periods after bankruptcy and foreclosure. There is no reason why a mortgage loan borrower should get a mortgage loan denial if the borrower was pre-qualified properly. Just taking the mortgage loan application and pulling the borrower’s credit to see if they meet the minimum credit requirements is not sufficient to warrant a solid pre-approval letter . The mortgage loan originator should not just look at the credit scores of the borrower but also carefully review the borrower’s credit report and make sure there are no credit disputes. All credit disputes needs to be retracted and removed prior to submitting the mortgage loan package to the mortgage loan processing and underwriting department. Credit disputes during the mortgage process is not allowed. There are many mortgage loan originators who submit the mortgage loan package to processing and underwriting with credit disputes and when the file gets assigned to a mortgage loan underwriter and the underwriters notices credit disputes, the mortgage file is suspended and kicked back to the mortgage loan officer to have them have the credit disputes retracted. Unfortunately, retracting credit disputes will lower a borrower’s credit scores. If a mortgage loan borrower has a credit score of 580 FICO, the borrower barely meets the FHA minimum credit score requirements for a 3.5% down payment home purchase FHA Loan. Minimum FHA credit score requirements to qualify for a 3.5% down payment FHA home purchase loan is 580 FICO. However, if the borrower has a 580 FICO credit score with credit disputes and the mortgage underwriter suspends it and kicks it back to the loan officer to have the credit disputes removed, the chances are that the borrower’s credit scores will drop and the mortgage loan borrower will no longer qualify for the 3.5% down payment FHA Loan due to their credit scores falling below 580 FICO credit scores.
Reasons For Mortgage Loan Denial: Marginal Debt To Income Ratios
Other common reasons for mortgage loan denial is due to high debt to income ratios. Mortgage loan originators should carefully go over figures and expenses on borrowers with high debt to income ratios. For example, if a borrower with a 56.9% DTI has any added expense such as higher than anticipated property taxes, homeowners insurance, or homeowners association than originally anticipated, this will result in a mortgage loan denial. It is always highly recommended that higher debt to income ratio mortgage loan borrowers have a non-occupant co-borrower on stand by in the event if they go over the maximum debt to income ratio permitted.
There are times where mortgage loan originators has used part time income, bonus income, and overtime income to qualify the borrower. However, there are times where the mortgage underwriter will negate the part time income, bonus income, and overtime income if the income is declining from one year after another. The income that needed to be used to qualify the mortgage loan borrower can no longer be used so this can be reasons for mortgage loan denial.
Other reasons for mortgage loan denial due to high debt to income ratios is when the loan originator did not calculate that the borrower is purchasing a home in a flood zone. Homes in a flood zone require mandatory flood insurance and flood insurance can be quite expensive. Homeowners insurance and flood insurance quotes should be provided and reviewed by the mortgage loan originator on borrowers with high debt to income ratios prior to the issuance of a pre-approval letter.
Ways Of Avoiding Mortgage Loan Denials
As long as a mortgage loan borrower has been properly qualified, there should be no reasons for mortgage loan denial. Not all mortgage loan applications are the same. There can be many different case scenarios and sometimes the guidelines can be vague. When a loan officer has questions on mortgage guidelines, they should consult with the underwriting department’s loan scenario desk and run the case scenario with an underwriter before submitting a mortgage loan file. Special attention needs to be addressed on the actual start date of waiting periods after foreclosures and deed in lieu of foreclosures. FHA and Fannie Mae have strict start date waiting period start dates to qualify for mortgage after foreclosure and deed in lieu of foreclosures. The start date of the waiting period is not the date that the property was surrendered but the date of the sheriff’s sale and/or the date that the homeowners name was transferred out into the name of the mortgage lender.
Reasons for mortgage loan denial can be avoided as long as the loan officer is diligent in qualifying the mortgage loan borrowers and make sure that the borrower meets all federal lending guidelines and meets the lender overlays.