Falling marginally outside the approval guidelines on a home loan won’t necessarily disqualify you from getting approved. If an underwriter reviews your application and you’re weak in some areas, strength in others may be enough to push you through to approval. The strength of these mitigating factors, combined with the lender’s comfort level in approving exceptions, will dictate your chances of getting the loan.
There are three major areas in qualifying for a home loan – credit, income and collateral. Credit score and history are very subjective. Typically, a “good” credit score is above 670, while “fair” falls around 650 and “poor” is 600 or less. A low credit score combined with delinquency, collections, liens and judgments will make it difficult to get approved. Your debt-to-income ratio should be between 36 and 43 percent, meaning no more than 43 percent of your income should be allotted to paying debt. Finally, the total amount of the loan can’t exceed between 80 and 95 percent of the value of your home.
An exception occurs when you fall outside of the lender’s guidelines, but the lender moves forward with the approval. Typically, a lender will only approve a slight or marginal exception. For example, a debt-to-income ratio of 41 percent when the maximum is 40 is easy to overlook if everything else is copacetic. However, if your debt-to-income ratio is 75 percent, chances are you won’t get the loan no matter how low your loan-to-value ratio or how high your credit score. Sometimes, a lender will approve the exception with no change in the terms of the loan. Other times, a lender may go forward with an exception, but add a higher rate or additional fee. It all depends on the lender’s policy and how far the exception falls outside the lender’s guidelines.
The criteria that make the lender overlook the exception are known as mitigants. Using the previous example, If your loan is at a 41 percent debt-to-income ratio, but your credit score is 750 and your loan-to-value ratio is 50 percent when you can have a maximum of 80 percent, chances are the lender will approve the exception. However, if your debt-to-income is 41 percent, your credit score is 600 and your loan-to-value is maxed at 80 percent, the lender may hesitate to approve the loan unless you have some other mitigant, such as strong repayment history on previous loans or significant cash deposits in the bank.
Once the underwriter has noted your exceptions and cited the mitigants, he will submit the loan for approval. All lenders have an approving authority for its loans. For example, a loan under $300,000 may only need to be approved by a senior loan officer, while a $1,000,000 loan may have to go before a committee. The approval authority for exceptions may or may not be the same. For example, the senior officer may or may not be able to approve an exception within his $300,000 lending authority. Sometimes, a loan with an exception will have to go to the next-level signing authority, depending on the lender’s policy. Once approved at the proper level, the loan can move forward with the exception noted.
- Office of the Comptroller of the Currency: Loan Portfolio Management
- Fortner, Bayens, Levkulich & Garrison, P.C.: Loan Policy Exception Management
- Experian: What Is a Good Credit Score?
- Smart Asset: What Is a Good Debt-to-Income Ratio?
- InCharge Institute of America, Inc.: How to Calculate Debt-To-Income Ratio
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.