Your mortgage loan application was rejected. These are tough words to hear, as getting denied for a mortgage can be heartbreaking.
Mortgage denial rates varies by city but studies show roughly 8% of mortgage applications are denied. Birmingham, AL came in at the highest, with a 13% denial rate.
So what are some of the reasons a mortgage is denied? What can stop you from getting a mortgage and you can prevent it from happening?
Why mortgage applications get rejected
The first step is to get an understanding of why your application was turned down. This should give you some insight as to what you'll need to do before applying for a mortgage again.
If credit was the reason for getting denied, your lender should have sent you a letter known as a Statement of Denial or Adverse Action Notice. This notice is meant to explain how your credit history resulted in your loan being denied, and provide reasons such as defaulted loans or too many inquiries, and explain certain rights you may have.
There are a number of reasons your home loan may have been denied.
- Credit score too low
- Debt-to-income (DTI) ratios are too high
- Down payment funds aren't enough
- Loan-to-value (LTV) ratio is too high / appraisal came back low
- Job status change
- Large cash deposits in bank accounts
Whatever the reason you've been declined, the good news is you can fix most of these issues with a little time and effort.
First, let's learn more about how different mortgage companies have different guidelines, and how underwriting guidelines can affect your loan being approved or denied.
Understanding mortgage guidelines
Mortgage guidelines are essentially home loan approval rule books. Understanding these guidelines can help you understand your loan options when purchasing or refinancing a home.
An underwriter assesses your loan application and conducts a series of pass/fail tests. Mortgage applicants must receive passing grades for each individual "test" in order to earn an approval.
When your loan is being underwritten, what's really happening is your loan's individual traits are being checked against a set of standards. Some of the most commonly tested traits may include the amount of time for which a person has been employed, income that receives heavy bonuses, issues with the property or the appraisal, issues with citizenship status or housing-payment history challenges.
Not all mortgage guidelines are created equal
Different types of mortgage loans have different criteria.
A conventional mortgage loan is also known as a conforming loan because it "conforms" to the guidelines of Fannie Mae or Freddie Mac. Similarly, an FHA mortgage meets the guidelines of the FHA. The same applies for VA loans, as well as USDA mortgages.
Most lenders have different underwriting guidelines set in place when reviewing a borrower's loan application to determine the likelihood of receiving on-time payments.
Guidelines are written according to the risk levels associated with each loan program.
Automated Underwriting. Most lenders use "automated underwriting" when rendering an underwriting decision. Automated underwriting is a technology driven underwriting process that provides a computer generated loan decision, also known as "findings".
Loan applications are designed to collect information specific to the individual applicant that can then be used to produce an automated underwriting decision. This information includes the applicant's name, address, date of birth, social security number and income details.
Automated underwriting platforms can then partner with information vendors and use basic loan application information to retrieve relevant data, such as a borrower's credit history.
From there the automated platform can process a borrower's information through a programmed underwriting process that instantly arrives at a loan decision.
Automated underwriting can be used in all types of loans and makes the first phase of the underwriting process much more efficient. It has the capability to provide instant outputs that can generally take up to 60 days to otherwise complete.
The use of automated underwriting also helps limit potential risk associated with granting an underwriting approval.
Investor Overlays. Different lenders assume varying levels of risk. In fact, the acceptable risk level may vary widely from one lender to the next. This is because when it all comes down to it, individual banks and lenders are on the hook if a homeowner defaults on their loan.
Most banks and lenders set their own approval standards that go beyond standard underwriting requirements. These standards are often known as "investor overlays."
Investor overlays are specific rules a lender follows that are above and beyond the published guidelines set forth by Fannie Mae, Freddie Mac, FHA, VA and USDA.
Overlays are in place to help with any necessary risk as well as the current economic conditions. This means that the overlays can get stricter in tough economic times and become more lenient in prosperous times.
These overlays dictate when a lender can go off the automated underwriting findings. Each lender typically has their own set of internal overlays that are applied to mortgage loans.
Banks and credit unions are known to have some of the tougher overlays. On the other hand, some lenders have no overlays.
Final words about mortgage denials
No one wants their mortgage loan denied at the last minute, especially if you were pre-approved. This includes the homebuyer, the lender and the real estate agent.
Fortunately, most of the reasons a mortgage is denied can be prevented. It's important to understand why mortgages get denied after pre-approval so you aren't making any of these mistakes.
Prior to making any decisions that could impact your financial situation, speak with your lender. He or she can often help ensure you don't do anything that could hurt you when applying for a mortgage loan.
