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Nobody wants to hear that their mortgage loan was rejected during underwriting when buying a house. Fortunately, if your loan was properly preapproved before you found a home, it’s unlikely you’ll learn this information. There are steps you can take to improve your chances of purchasing a home if your application for a mortgage is rejected by underwriting.
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Nobody wants to hear that their mortgage loan was rejected during underwriting when buying a house. Fortunately, if your loan was properly preapproved before you found a home, it’s unlikely you’ll learn this information. There are steps you can take to improve your chances of purchasing a home if your application for a mortgage is rejected by underwriting.
Common reasons loans are denied in underwriting
These were the top six reasons for mortgage denials in 2020, according to a report by the National Community Reinvestment Coalition (NCRC):
How undisclosed debt on a mortgage application can cause loan denial
There are several quality control reports that mortgage lenders run to look for unreported debt on a mortgage application. Your approval could become a loan denial or, worse yet, the subject of a fraud investigation if they discover additional debt at any point during the mortgage application process.
Some examples of undisclosed debt include:
Private mortgages on real estate. The loan balance and monthly payment must be disclosed if you obtained financing from a private investor or a relative to purchase a home. Lenders look up your name on other properties in public records across the country.
Recent credit applications. Even if it doesn’t appear on your credit report, let your lender know if you recently opened a new credit account. Up until the closing date, lenders will continue to “refresh” your credit report; any new debt may cause delays or a denial.
Alimony or child support. Even though these debts frequently don’t show up on your credit report, underwriters look for evidence of consistent debt payments like alimony or child support on your bank statements and paychecks.
Payment arrangements for past-due taxes or judgments. Provide all supporting documentation up front if you’re on a payment plan for past-due IRS taxes or payments for a judgment.
6 steps to take if your mortgage is denied in underwriting
Take the following six actions before giving up on your home purchase if your loan application is rejected:
THINGS YOU SHOULD KNOW
It’s critical to comprehend the distinction between an underwriting approval and a mortgage preapproval. A lender’s preliminary evaluation of your loan application, credit report, and the initial documents you provide forms the basis for a preapproval. In most cases, if your credit history, income, or down payment funds don’t meet the basic requirements of the mortgage program, you won’t advance to the underwriting stage.
The mortgage underwriting procedure involves a thorough investigation of your credit, income, and savings history as well as a close examination of the house you’re buying.
How often does an underwriter deny a loan?
Recent data on mortgage lending activities by the Home Mortgage Disclosure Act (HMDA) shows that loan denials are more frequent on applications for home equity loans, loans for home improvements, and refinances. Home purchases have the lowest denial rates.
According to 2020 HMDA data compiled by the NCRC, the table below displays the home purchase, home equity, and home improvement loan and cash-out refinance denial rate by race.
How to avoid a mortgage loan denial
You can take some steps to lessen your chances of having your mortgage application denied during underwriting.
REPAIR YOUR CREDIT BEFORE YOU APPLY.
You can improve your credit score and avoid the disappointment of a mortgage rejection by taking these actions before you submit a loan application, whether it’s paying off credit cards that are at their maximum limit or refinancing out of a cosigned car loan.
FILL OUT A COMPLETE AND ACCURATE LOAN APPLICATION.
Taking the extra time to give the lender the most accurate information, whether it’s a previous address or the precise start and end dates of prior employers, may lower the likelihood of being denied after preapproval.
DON’T SWITCH JOBS OR CHANGE HOW YOU’RE PAID.
Your chances of being accepted in terms of income are highest if you work a full-time, salaried job for two years. A job change before closing could cause your closing to be delayed or turn an approval into a denial because lenders verify your employment up to and including the day of your closing.
GET A FULL CREDIT APPROVAL BEFORE YOUR HOUSEHUNT.
Before you find a home, many lenders offer full credit approvals that let you have your income, credit, and assets thoroughly examined by an underwriter.
BEFORE APPLYING, HAVE YOUR DEPOSIT IN THE BANK FOR AT LEAST TWO MONTHS.
To demonstrate that you have the money for a down payment, most lenders demand two months’ worth of bank statements. If you have money saved up, deposit it a few months before you apply for a loan.
GET RID OF AS MUCH DEBT AS POSSIBLE.
You’ll have more mortgage borrowing power the less debt you have. Don’t use credit after receiving preapproval; lenders always check your credit before closing.
APPLY FOR THE RIGHT LOAN PROGRAM.
Read up on the minimum mortgage requirements in advance so that you don’t apply for a loan program with a low likelihood of approval. If a particular lender doesn’t provide the program that best suits your needs, keep looking until you find one that does. Generally speaking, loans backed by government organizations like the FHA, the U S. Department of Veterans Affairs (VA) and the U. S. Compared to conventional loans, Department of Agriculture (USDA) loans are simpler to qualify for.
WORK WITH AN EXPERIENCED LOAN OFFICER.
Experienced loan officers frequently know how to best present a challenging credit or income history to an underwriter to increase your chances of success.
DON’T SUBMIT AN APPLICATION FOR THE MAXIMUM MORTGAGE LOAN AMOUNT YOU ARE ELIGIBLE FOR.
Lenders typically provide an estimate of your property taxes, insurance, and HOA fees when you are preapproved for a home loan. Your DTI ratio could be rejected by an underwriter if you don’t account for unexpectedly high property taxes or expensive HOA dues for the home you ultimately choose.
FAQs about mortgage loan denials
According to a 2020 report by the Consumer Financial Protection Bureau (CFPB), FHA borrowers are more likely to be denied for FHA loans than all other loan types: 14.1% of FHA purchase loans and 22.2% of FHA refinance applications were turned down in 2020.
Yes. Before you sign closing papers, many lenders use third-party “loan audit” companies to confirm your income, debts, and assets once more. Your loan application may be rejected if there are significant changes to your credit, income, or ability to repay.
Lenders track closing rates, which is the proportion of loan applications that closed within the last 90 days, rather than the frequency of denials of borrowers after preapproval. This could help you determine your chances of reaching the negotiating table. Based on the loan type and purpose, closing rates from the Origination Insights Report through December 2021 are shown.
In many cases, yes. Make sure your employer is aware that a pre-closing call to confirm your employment is expected in order to prevent delays in this process.
You won’t be turned down if your score satisfies the minimal credit score requirements for the program you applied for. However, if this occurs, speak with your loan officer as your interest rate and costs may increase due to the lower score.
Yes. You can submit an application with a different lender if you hear that the underwriter may be getting ready to reject your loan.
Today’s Mortgage Rates APR as low as
Here are some first-time homebuyer suggestions to assist you as you embark on the process of purchasing your first residence.
Learn about the various mortgage loan types, including conventional loans and government-backed FHA, VA, and USDA loans, so you can make the best decision.
If you have a great house hunting checklist, you might be able to get the home you want instead of losing out to someone who was more prepared.
FAQ
Is no news good news when loan is in underwriting?
When you don’t hear “Clear to Close” in the time frame you expected, it can be worrying. However, a lack of updates could also indicate that your lender is receiving an unusually high number of loan applications. Maintaining contact with your loan officer is the best way to allay your worries.
When should I hear back from underwriting?
It can take as little as two to three days to complete the underwriting process, which is required by mortgage lenders before they can approve a loan for a home. However, a loan officer or lender typically needs more than a week to complete the procedure.
How long do underwriters take to make a decision?
Though almost all applications are finished within a week, mortgage underwriting typically takes no more than three to four working days, and this time frame can easily be extended if additional information is needed.
How do you know when your mortgage loan is approved?
When your mortgage loan is approved, your loan officer will typically contact you by phone or email to let you know. Sometimes, your loan processor will pass along the good news.