Mortgage Loan Denied Last Minute? Here is What to Do

What are the chances of getting denied after pre approval? A mortgage loan should never get denied. Once a loan officer issues a pre-approval letter, the loan should close. A loan officer should never issue a pre-approval letter if he or she thinks there is a one percent reason for loan denial. If a loan officer has any doubts about the qualification of a borrower, the loan officer should check with an underwriter prior to issuing a pre-approval letter. In the above examples, we will talk about all mortgage denial reasons that can happen and how to avoid them.

Preparing For The Next Options When Denied For A Mortgage At Last Minute

Preparing For The Next Options When Denied For A Mortgage At Last Minute

Capital Lending Network, Inc. has many calls from borrowers on the topic of what to do after having a mortgage loan denied. It is one thing to be told you do not qualify for a mortgage during the pre-approval stage but getting a loan denied at closing is another matter. Over 75% of our borrowers at Capital Lending Network, Inc. are folks who could not qualify or got a last-minute loan denial at other mortgage companies. There are many reasons for a last-minute mortgage loan denial. Some of the reasons can be a drastic drop in credit scores, loss of employment, outstanding debt popping up at credit reports, undisclosed debt, or loan officer incompetence.  In this article, we will discuss and cover what to do after having a mortgage loan denied.

What To Do After Having a Mortgage Loan Denied: Reasons For A Loan Denial

One of the most common reasons for a last-minute loan denial is due to the loan officer not properly qualifying the borrower before issuing a pre-approval letter. In most cases, a mortgage loan denied in underwriting means an underwrite will prepare a list of conditions that need to be cleared out to be able to move forward.  Loan officers need to thoroughly review the borrower’s income docs, credit report, asset, and other documents before issuing a pre-approval letter. For example, one of the most common mistakes loan officers make is not thoroughly reviewing the borrower’s credit report.

Credit Disputes Can Trigger Suspense

They often overlook credit disputes. Credit disputes during the mortgage process are not allowed. Once the mortgage underwriter discovers credit disputes during the mortgage process, the file gets placed in suspense until the consumer retracts them. Once a credit dispute gets retracted, the consumer credit scores will drop. The drop in credit scores may no longer qualify the borrower.

Public Records Not Reporting On Credit Bureaus

Other loan officer mistakes can be not asking borrowers questions like public records. Public records not reporting on credit reports will get discovered during the mortgage process. All mortgage companies will do a third-party national public records search. Therefore,  judgments, foreclosures, bankruptcies not reporting on consumer credit reports will get discovered by the lender during the third-party national public records search.

How Often Are Fha Loans Denied in Underwriting?

How Often Are Fha Loans Denied in Underwriting?

Besides loan officer error, there are other reasons why mortgage loans can get denied. Some reasons may be due to the homebuyer, others due to the home sellers, and yet others due to the property. All of these issues that may hinder the mortgage process need to be addressed prior to the loan being submitted to a mortgage underwriter. Below are typical issues that can lead to a mortgage loan denial:

  1. Income and/or employment issues of the borrower: A verification of employment should be ordered if there is a discrepancy on overtime, bonus, or other income prior to processing the loan
  2. Credit issues such as credit disputes or errors on the credit report
  3. Home inspection and/or appraisal issues
  4. Title issues
  5. Debt to income ratio issue

It is recommended to make sure all potential issues are clarified before the loan officer submits the loan for processing and underwriting.

Agency Guidelines Versus Lender Overlays

Not all lenders have the same mortgage lending requirements on FHA, VA, USDA, and Conventional loans. All mortgage companies need to meet the agency minimum agency guidelines. However, mortgage companies can have higher lending requirements that are higher than the minimum agency mortgage guidelines. For example, HUD requires a 580 credit score for homebuyers to qualify for a 3.5% down payment FHA loan. However, lenders can require a 620 or a 640 credit score on FHA loans as part of their lender overlays.

Choosing The Right Mortgage Lender?

Many loan officers are not fully familiar with their lender overlays prior to issuing a mortgage pre-approval. A borrower can get an approve/eligible per automated underwriting system but not qualify with a  particular lender due to that lender overlays. Lenders can have lender overlays on just about anything. Loan officers issuing a pre-approval letter without checking their lender overlays is one of the reasons borrowers can get a last-minute loan denial. If you have less than perfect credit and lower credit scores, it is best that you hire a lender without lender overlays.

Capital Lending Network, Inc. is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans. Capital Lending Network, Inc. are mortgage bankers, correspondent lenders, and mortgage brokers. Over 75% of our borrowers are folks who either got a last-minute loan denial or could not qualify for a mortgage due to the lender overlays. We have a national reputation for being able to do mortgage loans other lenders cannot do.

Multiple Mortgage Denial By Lenders Due To Lender Overlays

The mortgage application process can be one of the most stressful processes a home buyer will go through in their lifetime:

  • This holds especially true for borrowers with less than perfect credit, low credit scores, open outstanding collection accounts, charge off accounts, prior bankruptcies, prior foreclosures, gaps in employment, or higher debt to income ratios
  • The first place home buyers will go to apply for a home loan is their local bank
  • Banks are not the only lenders where a home buyer can get a mortgage
  • There are mortgage companies such as mortgage brokers, mortgage bankers, and credit unions

Mortgage Guidelines Required By Lenders

Not all lenders have the same mortgage lending guidelines:

  • Mortgage Guidelines are requirements and standards required by banks and mortgage companies of borrowers
  • Banks have one of the toughest lending requirements out of all lenders
  • Most mortgage companies have mortgage lender overlays
  • Overlays are additional lending requirements that are imposed by individual banks and lenders that are on top and addition to the minimum lending requirements set by FHA, USDA, VA, Fannie Mae, and Freddie Mac
  • Unfortunately, many mortgage loan applicants who go to their local bank to apply for a home loan and are told they do not qualify due to the bank’s lender overlays are not told that they may not qualify with the bank but they can qualify elsewhere

Many of these folks just take the word of the banker and do not bother shopping elsewhere to see if they qualify or not.

Options After A Mortgage Denial By A Lender

Many give up in being a homeowner:

  • However, there are many folks out there who will not take no for an answer
  • They do their own research to look for ways of finding a lender who can get them a mortgage loan approval so they can have the dream of homeownership become a reality
  • Over 75% of our borrowers who close on their home purchase loans with us were borrowers whose lenders had denied mortgage loan after pre approval
  • I have the highest respect for these individuals who did not give up after multiple mortgage denial by lenders
  • Some of my clients had denials by more than a dozen lenders and still kept on looking and found us whether through a referral or through the internet

Together we got them closed on their home purchase after they got multiple mortgage denial by lenders.

Reason For Multiple Mortgage Denial By Lenders

Not all mortgage lenders have the same qualification requirements.

  • There are two types of mortgage lending requirements
  • The first and most important are the lending guidelines that are set by FHA, VA, USDA, Fannie Mae, and Freddie Mac
  • We will be discussing FHA Loans and Conventional Loans on this article since they are the two most popular mortgage loan programs
  • The second type of mortgage lending requirements are set by the individual banks and lenders called lender overlays
  • All banks and lenders need to meet the minimum federal mortgage lending requirements for the individual mortgage loan program a borrower is applying

However, not all lenders need to follow only the minimum mortgage lending guidelines.

Agency Guidelines Versus Lender Overlays

Lenders can set tougher and additional standards and requirements on top of the minimum mortgage lending guidelines

  • For example, the Federal Housing Administration is a government agency that sets the standards for FHA Loans
  • FHA is not a mortgage company
  • FHA does not originate or fund FHA Loans
  • They do is insure FHA Loans against borrower default to FHA approved private banks and mortgage companies that originate and fund FHA Loans
  • In order for FHA to insure lenders against borrower default, lenders need to abide by HUD Guidelines

HUD is the parent of FHA.

There Should Be No Reason For Multiple Mortgage Denial By Lenders

There Should Be No Reason For Multiple Mortgage Denial By Lenders

In order for HUD to insure FHA Loans originated and funded by private banks and lenders against default, lenders need to follow all FHA Guidelines.

  • FHA Guidelines on minimum credit score requirements is 580 for a home buyer to qualify for a 3.5% down payment FHA Loan
  • However, even though the minimum credit score requirements is 580, most banks will not accept any borrowers with higher credit scores due to their overlays
  • Many have overlays where they require credit scores of at least 620 to 640 on government loans
  • Many lenders have a minimum credit score requirement on VA Home Loans when VA does not require any minimum credit score requirement nor has a debt to income ratio cap
  • The higher credit score requirement is called a Lender Overlay On Credit Scores imposed by lenders
  • So, for a consumer who has studied HUD Guidelines and has saved up money for a down payment on a home and knows that his or her credit score is at least 580 and goes to a bank to be told they do not qualify, can be discouraging
  • Then this home buyer will go to another mortgage company and get told that they do not qualify because their standards on credit score requirements are 620
  • This happens so many times
  • Unfortunately, this happens to so many home buyers that many of them just give up

The good news is that there are direct lenders like Capital Lending Network Inc that will only go by the minimum agency guidelines and do not have any overlays. A large percentage of our borrowers are Borrowers With Under 620 Credit Scores.

Overlays On Debt To Income Ratios

Another reason why many borrowers get multiple mortgage denial by lenders is due to high debt to income ratios.

  • FHA Guidelines On Debt To Income Ratios allow a maximum debt to income ratio for borrowers with at least a 620 Credit Score to be as high as 56.9% DTI back end and 46.9% front end to get an approve/eligible per automated underwriting system
  • However, most banks and mortgage companies have a debt to income ratio overlays that cap it at 45% to 50%
  • Department of Veterans Affairs (VA) does not require a debt to income ratio cap as long as borrowers can get an approve/eligible per automated underwriting system
  • However, most lenders will limit debt to income ratio caps at 45%

GCA Mortgage Group recently closed on a VA Home Loan with a 64% debt to income ratio.

Loan Denied After Clear to Close

Other common reasons why mortgage loan borrowers get denied or do not qualify for a home loan with banks and lenders are due to gaps in employment in the past two years.

  • Banks and mortgage lenders want to see a solid two-year employment history with the same employer by mortgage applicants and frown on those with employment gaps in the past two years
  • Mortgage lending guidelines allow for gaps in employment in the past two years
  • Borrowers can qualify with gaps in employment in the past two years
  • Borrowers who have been unemployed for six or more months and just got a full-time job need to have six months of employment history on their new full-time job in order to qualify for a home loan
  • Borrowers who have been unemployed for less than six months and just got a new full-time job, they can qualify for a home loan after the start of their new full-time job
  • However, they need to provide 30 days paycheck stubs before the mortgage underwriter will issue a clear to close

Multiple Mortgage Denial By Lenders Due To Collection Accounts

Many people have gone through periods of bad credit due to extenuating circumstances such as unemployment, loss of business, changes in careers, divorce, medical reasons, or other reasons where it affected their credit. With FHA Loans, borrowers do not have to pay off outstanding collection accounts and charge off accounts with balances. However, most banks and lenders will have overlays on collection accounts, Most lenders will want the borrower to pay collections and charged-off accounts in full prior to taking their mortgage loan application. Many banks and lenders will not accept anyone who had any derogatory credit accounts and late payments in the past 24 months. Some even want the paid collection accounts to be seasoned for at least two years before they will take them on board. Mortgage borrowers with outstanding collection accounts and charge-off accounts and are told they do not qualify for a mortgage loan, please contact us at 773-732-5773 or text us for a faster response. Or email us at peter@capitallendingnetwork.com. We have no overlays on collection accounts and charge off accounts with balances. We have zero overlays on government and conventional loans.


Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.

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