Confessions of a Mortgage Reject, And Life After Rejection

mortgage rejectionA writer for the Home Buying Institute was recently turned down for a mortgage loan by Bank of America. We’ll call him “Dave.”

He has agreed to share his story with our readers, in the hope that other home buyers can learn something from his experience. He has requested anonymity.

Borrower Profile: Dave and his wife both have excellent credit scores. This was their third home-buying experience. They’ve owned two homes in the past, and they’ve never missed a single mortgage payment in over a decade. This time around, they were using a VA loan to buy a home in San Diego County. This was to be their primary residence — not an investment property.

Mortgage Summary: Dave and his wife started out using Bank of America. After being told they were “approved” on two separate occasions, the underwriter eventually rejected their file. They were officially turned down for the mortgage on May 31, 2011. After the Bank of America rejection, they applied with a smaller lender and were subsequently approved for the loan.

The rest of this story is in Dave’s own words:

A Tale of Mortgage Rejection

This experience has been quite a roller coaster for us. But it turned out well in the end. In fact, it turned out better than we could’ve expected. That’s why I’m so eager to share out story with other home buyers. I want people to learn from our experience. I think people will find our story more useful than a lot of the “how to” articles online these days. It’s a real-world lesson in mortgage rejection.

So here it goes…

I’ve included a timeline below, so readers can see exactly what we went through (and how long it took). You’ll notice a big difference between the two lenders, as far as loan processing goes. Bank of America took a long time to process our application, compared to the smaller lender. We’re talking two months as compared to a couple of weeks.

Loan Application Timeline

This is the process we went through with Bank of America, leading up to the ultimate rejection on May 31:

  • We sent our mortgage application to the loan officer on April 3, 2011.
  • We got pre-approved on the same day (based on our application and credit scores).
  • On April 5, they sent us a list of documents they needed, such as tax returns.
  • From April 5 up to the conditional approval, we had to provide copies of all ongoing deposits and withdrawals from our bank accounts. They wanted to know where our money was going during this period, and where the new deposits were coming from.
  • We received a conditional approval on April 28, 2011. A conditional approval is when the lender says, “We will approve the loan if you satisfy the following conditions…”
  • We satisfied all conditions and provided the requested info by May 4, 2011. One of the most significant conditions related to a credit card. We had to pay off a $12,000 credit card balance in order to lower our debt-to-income ratio [defined]. We were led to believe the loan would go through, if we complied with this request. So we paid off the card.
  • The lender ordered the property appraisal on May 5, 2011. We had to pay this fee upfront, as opposed to having it rolled into closing costs. It cost us $500.
  • Just when we thought we were done, the loan processor sent us a second list of conditions that had to be met. This time, they wanted several written explanations relating to our finances (like an explanation of a late payment on a credit card from six years ago).
  • We satisfied the second set of conditions on May 16, 2011.
  • That same day, our mortgage file was sent to the underwriter for review.
  • Also on May 16, 2011, the bank worked with our chosen insurance provider to order the homeowners policy. (You need home insurance before you can close on a loan.)
  • The underwriter requested additional info on May 18. We provided it the same day.
  • We received the HUD-1 settlement statement on May 20. We were also notified of a cash-reserve requirement that was not previously disclosed. *
  • On May 23, 2011, the loan officer started working on an exception for the cash-reserve requirement. She told us she’d have an answer “in a few days.”
  • The loan officer did not formally submit the exception request until May 26.
  • The loan officer called and emailed on May 27, giving us the good news that the loan had been “signed off” on.
  • On May 31, 2011, we were notified that the loan had been declined.

Total time from mortgage application to rejection = 59 days.

* We specifically asked the loan officer about cash-reserve requirements in advance, at the time we applied for the loan. She told us VA loans had no reserve requirements. So when the underwriter told us we needed six months worth of cash reserves only days before closing, we were shocked.

Turned Down by One Lender, Accepted by Another

At first, being rejected by BofA [Bank of America] was like a blow to the stomach. We weren’t sure what to do next. Our lease was up in less than a month. We thought we would have to scramble to find a suitable rental property (since we were moving from one part of the state to another). But then the sales person from our builder’s office suggested another lender. Apparently, ours was not the first loan to collapse in this fashion.

The other lender told us they had no cash-reserve requirements. The new loan officer said the VA does not require cash reserves on VA home loans. He explained that his company did not use “overlays” (additional requirements) on top of the VA’s requirements. This was good news to us, because the cash reserves were the only problem with Bank of America. We were qualified in all other areas.

So we applied for a loan through the other lender. And let me tell you, it was like switching from a Kia to a Mercedes! The difference between these two lenders was like night and day.

Timeline Part 2 – The Second Time Around

Compared to our first experience, things moved more quickly the second time around. These guys were like a well-oiled machine. My wife referred to them as “mortgage ninjas” at one point.

Here’s the timeline:

  • On May 23, when the Bank of America drama was still unfolding, we spoke to our sales agent at the home builder. She suggested we apply for a backup loan in case BofA turned down the exception request.
  • We spoke to the new lender and completed an application by phone on May 24, 2011.
  • We submitted some additional financial documents on May 25.
  • The new lender pre-approved us on May 25.
  • We received disclosures from the new lender on May 27. It explained the terms of the loan, the interest rate, and other required disclosures.
  • The lender needed us to sign and return the mortgage disclosures. They also needed Bank of America to release our original VA case number before they could submit our loan package to underwriting.
  • The builder required us to wait until BofA officially declined our loan (which happened on May 31), before proceeding with the new lender.
  • We sent the signed disclosures back to the new lender on May 31.
  • We sent some follow-up information to the new lender on June 1, 2011.
  • Our loan package was submitted to the underwriter that same day.
  • The new lender gave us a final approval two days later, on June 3.

Total time from mortgage application to final approval = 11 days.

Admittedly, things moved faster the second time around because we were able to use some of the documents from the Bank of America process (like the home appraisal). But it was still like night and day, the difference between these two lenders. The smaller lender was much more efficient, and they communicated with us better than BofA did. Like I said earlier, it was like going from a Kia to a Mercedes. I remember saying to my wife, “It can’t be this easy, can it?”

Two Types of Rejection

Based on my experiences (and the research I’ve done for the Home Buying Institute), I believe there are two types of mortgage rejection:

  • Some borrowers get turned down for a home loan because they’re simply not qualified for a loan — with any lender. An example of this would be a borrower with bad credit and a mountain of debt. That person would probably be rejected across the board, no matter how many times they applied.
  • The other type of mortgage rejection is bank-specific. This is what happened to us. Bank of America had a lot of hang-ups about cash reserves.* They wanted us to have six months worth of mortgage payments in the bank before closing, and they sprung this requirement on us just days before closing. The other (smaller) lender was surprised to hear we had been turned down. They said we were “totally qualified” for the VA loan program. This is an example of a bank-specific mortgage rejection.

* I’d like to reiterate that this was not a VA loan requirement. It was a Bank of America “overlay” requirement. The second lender we used did not have any cash-reserve requirements.

As a borrower, you need to find out which “camp” you fall into. I recommend that home buyers check their credit scores and determine their debt-to-income ratios, before shopping for a loan. This will give you a good idea where you stand, in terms of mortgage qualification.

For example, if you have a FICO credit score above 750, and a debt-to-income ratio below 35 percent, you are well qualified for a mortgage loan. So, if you get turned down by one lender, you should apply with another.

On the other hand, if you have a credit score in the 500s and a debt ratio over 50 percent, you’ll probably be rejected by most mortgage lenders. This is a situation where you need to get your financial house in order first, before applying for another loan.

You need to know how you measure up.

Attention Home Buyers: Here Are My Lessons Learned

When it comes to mortgage lenders, bigger is not always better. I think a lot of home buyers flock to Wells Fargo and Bank of America, just because they know the names. They’ve seen them on TV, in the newspaper, etc. They feel it’s best to go with a “trusted name.”

The big banks might work for some borrowers. But it didn’t work for us. It was a long and exhausting runaround. We put a lot into the process, but got nothing out of it. We were just another statistic of mortgage rejection. Working with a smaller lender was a totally different experience for us. The process was smoother and easier. There weren’t as many hoops to jump through. And, most importantly, we finally got approved for the loan.

[Editor’s note: Here’s a related survey about bigger vs. smaller banks]

I would also encourage home buyers to ask about cash-reserve requirements in advance, before you get too far into the process. Look at the “rejection timeline” above, and you’ll see what a big problem this was for us. These requirements aren’t always disclosed up front. So you need to be proactive and ask about them. Simply ask the lender: “Will I be required to have cash reserves on closing day? And if so, how much will I need to have in the bank?”

It’s also important to understand the difference between pre-approval and final approval. Pre-approval doesn’t really mean much. It’s the lenders way of saying how much they might be willing to lend you. So it’s useful in that regard. But it’s not a commitment or guarantee — not even close. A lot can happen in the time between pre-approval and final approval. This is when the underwriting process takes place. Underwriting is when you really have to hold your breath.

Mortgage pre-approval is not a license to spend money from your savings, or to charge up your credit cards. That kind of behavior can create problems for you down the road, when the underwriter starts looking at your file.

Lastly, I would encourage home buyers to save as much money as possible. From what I’ve gathered, the three most common reasons for mortgage rejection are:

  1. Borrower’s credit score is too low
  2. Borrower has too much debt
  3. Borrower has insufficient funds for closing costs, cash reserves, etc.

Item #3 is what caused problems for us. Granted, the first lender wasn’t very clear about their cash-reserve requirements up front. But if we had put some extra money aside before applying for the loan, we might have cleared the obstacle that ultimately led to our rejection. Start saving your money now. Save as much as you can. Expect surprises along the way. You’re bound to encounter some.

Disclaimer: In this article, the narrator shares his personal experiences with Bank of America. We make no other assertions or claims about this company. Dave’s experience is unique to him, and he has shared his story in his own words. His views and opinions are his own.