How To Avoid Mortgage Loan Denial By Underwriters

In this blog, we will cover and discuss how to avoid mortgage loan denial by mortgage underwriters. Homebuyers depend and rely on a mortgage pre-approval by their lenders.  Once they get a written pre-approval letter from a mortgage lender, buyers then go shopping for a home and enter into a real estate purchase contract on a home. Mortgage applicants already have completed a loan application. Their credit has been checked and provided documents such as two years tax returns, two years W-2s, two months bank statements, and other required docs. The mortgage loan originator most likely got a Fannie Mae Automated Underwriting System DU approval and everything seems like a go. However,  during the underwriting process, their mortgage loan gets a mortgage loan denial. What went wrong?  In the following paragraphs, we will cover how to avoid mortgage loan denial by underwriters.

How to Avoid Mortgage Loan Denial By Underwriters

Every mortgage loan originator has their own style in how they originate and qualify the borrower’s mortgage loan application. The main reason for a mortgage loan denial is due to the fact that the borrower was not properly qualified. There are two types of mortgage guidelines. Federal mortgage guidelines by FHA, VA, USDA, Fannie Mae, Freddie Mac. Mortgage Lender Overlays by individual lenders. Automated Underwriting System Approval is required on all mortgage files unless it is a manually underwritten borrower. However, most lenders have lender overlays, and just because borrowers pass AUS does not mean that the particular lender can do the loan. Avoiding mortgage loan denial by underwriters involves careful preparation and ensuring you meet the lender’s criteria. 

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Steps to Prevent How To Avoid Mortgage Loan Denial

In this section, we will cover some steps to help you reduce the risk of your mortgage loan being denied. Get a copy of the credit report from Equifax, Experian, and TransUnion) and review them for errors. Dispute any inaccuracies you find and work on improving your credit score if it’s low. Lenders want a stable employment history and consistent income. Changing jobs or being self-employed may require additional documentation to prove your income stability.

Pay your monthly debts on time, reduce debts, pay down your credit card balances, and avoid opening up a new credit account when applying for a mortgage. Borrowers with higher credit scores will get lower mortgage rates. Lenders require a down payment, and the amount can vary. Saving for a large down payment can make you a more attractive borrower.

Reduce Debt-to-Income Ratio

Lowering your DTI by paying down debts can improve your chances of approval. Before and during the mortgage application process, avoid making large purchases, taking out new loans, or changing jobs if possible. These changes can raise red flags for underwriters. Be prepared to provide complete documentation of your financial situation, including bank statements, tax returns, pay stubs, and any other relevant financial records. Only apply for a mortgage within your means. 

Different lenders have different requirements and criteria. Shopping around and finding a lender that matches your financial situation is essential.

Get qualified and pre-approved for a mortgage before house hunting. This shows sellers that you’re a serious buyer and can speed up the closing process. If you have specific issues in your financial history, such as bankruptcy or foreclosure, be prepared to explain the circumstances and demonstrate that you’ve since become financially responsible. Mortgage brokers can help match you with wholesale lenders based on your financial profile. Be prepared to provide additional 

Lender Overlays Versus Agency Mortgage Guidelines

GCA Forums Mortgage Group is licensed in multiple states and has no lender overlays on government and conventional loans. We just go off AUS Findings. Unfortunately, not all lenders just go off AUS. The team at GCA Forums knows that we can get the mortgage loan processed, underwritten, and clear to close and closed with just an Automated Underwriting System Approval.

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Over 80% of Our Borrowers at GCA Forums are Folks Who Could Not Qualify at Other Mortgage Companies

Unfortunately, most lenders have their own lender overlays which surpass Fannie Mae’s Automated Underwriting System approval and during the mortgage underwriting process, a mortgage loan denial is possible due to overlays. Over 80% of our borrowers at GCA Forums are mortgage applicants who have gotten denied by other lenders. The way the team at GCA FORUMS qualifies our borrowers who have challenged credit is to go over their case scenarios with a mortgage underwriter and cover every possible hurdle.

Importance of Solid Pre-Approval Letter

All of our pre-approvals are fully underwritten and are a full credit loan approval signed off by our underwriters. One of the main reasons for a possible mortgage loan denial is if the borrower has a high debt to income ratio where every additional income can get the borrower over the maximum allowable debt to income ratios.

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Here Are Possible Steps How to Avoid Mortgage Loan Denial

There are many reasons for a last-minute mortgage loan denial. Maximum debt to income ratios allowable for FHA loans is 46.9% front end and 56.9% DTI back end to get an AUS approval. If the borrower barely meets the required debt to income ratios and there are any additional expenses, it will disqualify the mortgage loan borrower and will trigger a mortgage loan denial per AUS. Most lenders have overlays on debt-to-income ratios.

Easy Steps How to Avoid Mortgage Loan Denial

Examples of reasons for mortgage loan denial are additional expenses incurred due to the interest rates have gone up. The insurance premium is higher than expected. Homeowners association fees were not calculated corrected. Flood insurance is required. Other income cannot be used.

Borrower applied for additional credit cards and did not tell the lender about it. Borrower maximized their credit cards so monthly payments increase. Borrowers purchased or traded in their vehicles. Borrower changed jobs.

The borrower had a recent overdraft. Borrowers forget to pay their bills on time. Another reason for mortgage loan denial is the lender cannot verify the down payment. This is because the borrower has used it or funds in banking account cannot be sourced.

How to Avoid Mortgage Loan Denial? What To Do If Denied?

Borrowers who have been denied by a bank, credit union, or mortgage banker, find out what the reason was. Not all lenders have the same mortgage guidelines. Most lenders have lender overlays. GCA Forums does not have any overlays on government and conventional loans.

If borrowers meet the federal mortgage guidelines but got mortgage loan denial due to lender overlays, the option is to go to a different mortgage lender with no overlays.

Borrowers who are working with a mortgage lender with overlays and need a lender with no overlays on government and conventional loans, please contact GCA Forums at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays. As mentioned earlier, over 75% of our borrowers are folks who have been denied a mortgage loan by another lender or are stressing over their mortgage process due to their overlays.

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FAQ’s on How to Avoid Mortgage Loan Denial

What are the most common reasons for mortgage loan denial?

• Low credit score: Most lenders require a minimum credit score 580 for FHA loans and 620 for conventional loans.
• High debt-to-income (DTI) ratio: You may be denied if your DTI exceeds lender limits (typically 43-50%).
• Insufficient income or employment history: Stable employment for at least two years is preferred.
• Low appraisal value: If the home appraises for less than the loan amount, it can impact approval.
• Large, unexplained bank deposits: Lenders need to verify the source of large deposits to prevent fraud.
• Errors on credit report: Incorrect negative items can lower your score and impact approval.
• Inadequate down payment or reserves: Certain loan programs require proof of sufficient savings.
• Recent major credit changes: Removing new debt or missing payments before closing can trigger denial.

How can I improve my chances of getting mortgage approval?

• Check your credit score early: Review and address any errors before applying.
• Reduce your DTI ratio: Pay off or reduce outstanding debts before applying.
• Save for a larger down payment: This reduces lender risk and improves approval odds.
• Maintain stable employment: Avoid job changes before or during the loan application process.
• Avoid making large purchases: New car loans or credit card debt can negatively affect your application.
• Get pre-approved: This helps you understand what loan amount you qualify for and highlights potential issues upfront.

How to Avoid Mortgage Loan Denial? Can I still get approved if I have a low credit score?

Yes, but options may be limited:

• FHA loans: Require a minimum 580 credit score with a 3.5% down payment or 500 with 10% down.
• VA loans: No minimum credit score is required, but lenders typically prefer 580-620.
• Non-QM loans: Alternative lending options exist for those with lower credit scores or unconventional income sources.

How to Avoid Mortgage Loan Denial? What should I do if my application is denied?

• Ask the lender for reasons: They must explain the Equal Credit Opportunity Act (ECOA).
• Improve credit score: Pay down debts, make timely payments, and dispute inaccuracies on your credit report.
• Consider a different lender: Some lenders have more flexible guidelines or offer alternative loan products.
• Increase down payment: A higher down payment can offset risks and improve approval chances.
• Find a co-signer: A co-borrower with stronger financials may help secure approval.

How to Avoid Mortgage Loan Denial? Does Employment and Income Affect Loan Approval?

• Consistent income is crucial: Lenders typically require two years of steady employment.
• Self-employed borrowers Need at least two years of tax returns showing stable income.
• Variable or commission-based income: Lenders average earnings over two years to assess stability.

How to Avoid Mortgage Loan Denial? Will applying for multiple mortgages hurt my credit score?

• Rate shopping within a short window (14-45 days, depending on the scoring model) is treated as one inquiry.
• Too many inquiries outside this period can lower your credit score and raise red flags for lenders.

How to Avoid Mortgage Loan Denial? Can I get Approved if I recently changed jobs?

• It depends on the job and industry: If you remain in the same field with equal or higher pay, it’s usually not an issue.
• New self-employment may delay approval: Lenders typically require two years of self-employment income.
• Job gaps can impact approval: A long unemployment period before applying may be problematic.

What role does the home appraisal play in mortgage approval?

• If the home appraises lower than the loan amount, you may need to renegotiate the price or increase your down payment.
• Appraisals ensure the home is worth the financed amount, protecting both the buyer and lender.

How to Avoid Mortgage Loan Denial? Does it Affect Future Applications?

• It does not automatically prevent you from applying elsewhere, but multiple denials can signal financial instability.
• Each hard credit inquiry can slightly lower your credit score.
• Waiting 3-6 months to improve finances before reapplying is recommended.

How to Avoid Mortgage Loan Denial? What to Do Before Closing on a Mortgage?

• Do not apply for new credit: Avoid new credit cards, auto, or personal loans.
• Do not miss payments: Late payments can quickly lower your credit score.
• Do not make large, unexplained deposits: Keep financial transactions consistent.
• Do not change jobs: Stability is key for approval.
• Do not ignore lender requests: Provide requested documents promptly to avoid delays.

By taking proactive steps to strengthen your financial profile and avoiding common pitfalls, you can improve your chances of mortgage approval and successfully secure your dream home.