This guide covers why underwriters issue denials on mortgage loans. The mortgage process should not be a stressful process and there is no reason why a mortgage loan should not close after a pre-approval has been issued. All mortgages should close on time and Gustan Cho Associates has a 21-day close policy on most loans. Delays can and often due occur and the main reason for closing delays is due to borrowers not having proper documents submitted to their loan officer in a timely manner.
Why Underwriters Issue Denials and Reasons For Closing Delays
Here are the reasons for closing delays during the mortgage process: Borrowers not submitting necessary Mortgage Documents Required. Missing pages or items on documents provided. Home Appraisal not coming in at value. Needing to renegotiate the purchase contract between buyer and seller. Home Inspection found flaws with the home.
Buyers and sellers need to negotiate terms of repairs or price. The issue with the borrower’s credit that was not reflected on the initial credit report. The final walkthrough was not to the satisfaction of the buyer.
Borrower changed jobs during the mortgage process. Borrowers cannot document irregular deposit or withdrawal. Other minor issues discovered by the mortgage underwriter during the mortgage process. Error or errors on the credit report that needs a rapid rescore or credit supplement. Delays in the verification of employment from the employer. General contractor delays on FHA 203k Loans. Higher debt to income ratio than expected. Speak With Our Loan Officer for Mortgage Loans
What is the Role of Mortgage Underwriters
Mortgage underwriters play a crucial role in the home loan approval process, evaluating the risk of lending money to applicants based on several criteria. When underwriters issue denials, it’s generally because they’ve identified specific risks or discrepancies in the loan application that make the applicant unsuitable for the loan under the lender’s criteria. In the following paragraphs, we will cover some common reasons why underwriters might deny a mortgage application.
Borrowers with High Debt-to-Income Ratio (DTI)
Explanation: The DTI ratio is a crucial factor in the loan approval process, indicating the percentage of an applicant’s monthly gross income that goes towards paying debts. Most lenders prefer a DTI ratio of 43% or lower. Impact: A high DTI ratio suggests to lenders that you may have trouble managing monthly payments, increasing the risk of default.
Borrowers with Low Credit Scores
Explanation: Your credit score reflects your historical ability to manage and repay debts. A low credit score can result from late payments, high credit card balances, bankruptcies, or insufficient credit history. Impact: Underwriters use this metric to assess the risk level of lending to an individual; a low score may lead to a denial because it indicates a higher likelihood of loan default.
Borrowers with With Insufficient Income
Explanation: Underwriters evaluate whether your income is stable, reliable, and sufficient to cover monthly payments along with your other expenses. Impact: Inconsistent or insufficient income can trigger a denial because it raises concerns about your ability to fulfill your loan obligations.
Why Underwriters Issue Denials due to Borrowers With Inadequate Employment History
Why Underwriters Issue Denials due to Problems with the Property
Lack of Down Payment
Explanation: A substantial down payment reduces the loan-to-value ratio and lessens the lender’s risk. Impact: Underwriters may deny a loan if the down payment is too small, increasing the financial risk for the lender.
Why Underwriters Issue Denials Due to Incomplete Application or Documentation
Explanation: A fully completed application and all required documentation are necessary for evaluating a loan application. Impact: Missing or incomplete information can lead to a denial because the underwriter cannot fully assess the risk or verify the data provided. Explanation: A substantial down payment reduces the loan-to-value ratio and lessens the lender’s risk. Impact: Underwriters may deny a loan if the down payment is too small, increasing the financial risk for the lender. Explanation:
Why Underwriters Issue Denials due to Derogatory Credit Events
Explanation: Events like foreclosures, bankruptcies, or collections can severely impact your credit and indicate to lenders that you might be a high-risk borrower. Impact: Such events often result in loan denial unless sufficient time has passed, and you have demonstrated improved financial responsibility. Understanding these reasons can help applicants address potential issues before reapplying for a mortgage or to seek alternative financing solutions. Working with a mortgage professional to understand each aspect of the application and how to optimize it for approval is often beneficial. click here to apply for mortgage loan after Bankruptcy
Initial Mortgage Process
The pre-approval stage is the most important step in the mortgage process. The main reason Why Underwriters Issue Denials is due to loan officers not properly qualifying borrowers. Submitting a file to processing with a borrower who is not qualified is the major reason for loan delays or denials. Again, there is no reason why a solidly pre-approved borrower should not just close their home loan but close it on time. In the following paragraphs, we will cover why underwriters issue denials.
How To Properly Qualify Homebuyers To Avoid Stress During Mortgage Process
Here is the initial pre-approval mortgage stage: Once the borrower consulted with the loan officer, the loan officer completes the mortgage loan application. The loan officer runs credit and reviews the overall credit report from all three credit bureaus. Loan officer requests required mortgage documents such as the following:
- tax returns
- W2s, paycheck stubs
- bank statements
- divorce documents if applicable
- bankruptcy paperwork if applicable
- child support paperwork if applicable
- any other pertinent documents
How The Loan Officer Qualify Borrowers To Avoid Why Underwriters Issue Denials
Loan officer cross-references documents provided with a mortgage application and credit report: The loan officer will run the borrower’s file through the Automated Underwriting System. Hopefully will get an approve/eligible per AUS. Loan officer reviews AUS FINDINGS. Looks for conditions and sees if the borrower can meet all conditions from automated findings. Borrowers signed loan application. Disclosure package is then submitted to the opening department and gets assigned to a mortgage processor. The mortgage processor will scrub the whole file, order verification of deposit, verification of employment, and verification of rent. Once the mortgage processor sees that the file is complete, the file is then submitted to the underwriting department and a mortgage underwriter is assigned to the file. The loan processors make sure that all documents are in order.
Importance of Documents in the Mortgage Process
Make sure to have all the necessary supporting documents such as:
- W-2s
- income tax returns
- real estate purchase contracts
- appraisal
- tax information
- insurance bills for refinances
- paycheck stubs
- credit reports
- and all other necessary documents
The processor completes the package: If there is missing information that is needed, the processor will contact you. It is so very important to submit the processor’s request as soon as possible. Otherwise, your loan application will be delayed. Once the processor has all the necessary documents and completes the file, the processor then submits it to the lender to underwrite the loan.
Why Underwriters Issue Denials: Mortgage Underwriting Process
The underwriter does his or her own checks and balances: Mortgage underwriters role is to make sure everything in the loan application package is complete. The underwriter does a third party public records search through Core Logic, Data Verify, or Lexis Nexis. If a file is neat and complete, the mortgage underwriter will issue a conditional loan approval
The underwriter will only issue a conditional loan approval if the underwriter sees that the borrower meets all the necessary guidelines.
Although lenders need to make sure borrowers conform to standards set by government agencies, Fannie Mae, or Freddie Mac: Mortgage guidelines vary depending on the terms of each loan. In general, approval is based on two factors: The ability and willingness to repay the loan. The value of the property. Qualify for a mortgage loans without any stress
Conditional Loan Approval and Why Underwriters Issue Denials
Once a mortgage underwriter feels that the borrower meets all of the lending guidelines, the underwriter will issue a conditional loan approval. The conditional loan approval will be sent to the loan processor. Both the processor and loan officer will get to work in gathering all conditions. Once all of the conditions have been gathered, it is submitted to the underwriter for a clear-to-close.
The underwriter will check off on the conditions and normally will issue a clear to close. A clear to close means that the loan is ready to fund and docs should be prepared.
On rare occasions, a mortgage underwriter may add a few more conditions. The processor needs to get them and submit the additional conditions to the underwriter. Most underwriters will work with borrowers to get them approved. They have no intention on why underwriters issue denials.
The Final Process Prior To a Clear-to-Close
The underwriter then approves the loan and gives you a clear to close, which is the final step in the loan process. So if the borrower is properly qualified, there is no reason why underwriters issue denials. I do not remember why underwriters issue denials on the many files that I submitted. If you are in need of a fast pre-approval, please click APPLY NOW FOR MORTGAGE PRE-APPROVAL or contact us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, on evenings, weekends, and holidays to answer any questions or go over case scenarios. Speak With Our Loan Officer for Mortgage Loans
