Everyone probably knows someone that has had a bad mortgage loan experience. The mortgage loan process is a complicated one and sometimes the Lender can make a mistake, or the customer can as well. There are so many items that are reviewed and looked at throughout the course of the loan. Any one of those items can turn a pre-approval into a decline if they fail to meet the requirements of the loan.
There are so many different loan programs out there and each has its own set of guidelines that need to be met. This article is going to focus on the top 5 items that can cause issues during the loan process and ultimately lead to the loan getting declined.
Table of Contents:
1. Inaccurate Income
This is one of the most important pieces of the loan puzzle and I would argue is the leading cause of loan declines. The lender takes a loan application from an applicant and gets their monthly income information. The lender is relying on accurate information from the customer at this point.
It is very important to make sure that the income being used on the loan application will essentially match what can be verified on paystubs, W2’s, 1099’s, tax returns and Profit & Loss statements. A pre-approval is only as valid as the information used to create it.
An inaccurate income example that happens frequently is with self-employed borrowers. A borrower may state that their income is $80,000 per year but after reviewing tax returns and profit & loss statements, they are making $50,000 per year when taking into consideration business expenses written off against the income.
It is important to have a firm grasp of what the income picture looks like for a customer, otherwise, you may start the process and get halfway down the road before realizing there are issues.
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This isn’t as common as you may think because most of the time, the home being purchased appraises where it needs to and there are no major house related issues that prevent things from continuing. Especially, if the housing market is strong like it currently is in 2018.
There are times when a home will not appraise for what it needs to proceed. It happens more often when a house gets multiple offers and the home ends up selling for much more than the asking price. These bidding wars drive up the final price of the home and there is no guarantee that the home will appraise for that amount.
For example, a home being listed for $200,000 hits the market and has 20 showings and 10 offers in the first two days. The final accepted offer is $220,000. This is $20,000 over the original asking price and if the Appraiser cannot find comparable home sales to support this value, they may end up appraising the home for less than the offer of $220,000.
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If the home appraises for less, either the Seller needs to come down in price to match the appraisal or the Buyer needs to come to the table with more money out of pocket because the bank is only going to lend on what the appraised value came back at. This can create a situation where the buyer doesn’t have enough funds to cover this difference in value and then the transaction falls apart and turns into a decline because of a low appraisal.
The other issue that can come up is if a home has some major defects that are noted in the appraisal report and it can create a health/safety risk for the buyer. If these health/safety risks are not remedied and followed up on with a final inspection, it can result in the loan being declined due to the collateral and the risks it presents.
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3. New Debt Acquired during the Loan Process
This is something that is easily controllable and is completely out of the control of the lender. Most people abstain from applying for new credit cards, car loans or personal loans but not everyone. Applying for new accounts such as these is a big no-no because it can create a debt-to-income issue and ultimately lead to a loan decline.
For example, if the loan that you’re eligible for has a maximum debt-to-income ratio of 45% and you were at 44% at the beginning of the loan process, if you take out new debt, that could push you over the 45% threshold and lead to a decline.
It’s recommended to not apply for anything during the home buying process. Don’t put your pre-approval or approval in jeopardy. Wait until your loan closes and then you can explore the feasibility of applying for any new debt.
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4. Loss of Employment
This isn’t very common but can happen. If you are in the middle of the loan process and you happen to lose your employment, it will result in a decline if you no longer have enough income to meet the requirements of the loan program. Obviously, it is difficult to make your payments if you no longer have income coming in.
If the customer can find employment during the loan process, things may be salvageable if the income doesn’t drastically change and impact repayment ability. The amount of time on the job is not as big of a concern, especially when staying within the same profession or industry and having a similar position as before. Ideally, keep your job and if you’re looking to upgrade to another company, wait until after your loan has closed.
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5. Non-Verifiable Funds
This situation arises when it’s impossible to verify where funds came from. There needs to be a paper trail for the income or down payment funds to be used in the loan. For example, if you have cash saved in a safety box at home and then deposit those funds into your bank account, you will not be able to use those funds for the loan. The same applies if a friend or family member were to give you cash.
Keep in mind that everything needs to be sourced to make sure it’s legitimate funds and isn’t derived from money laundering, drug trafficking or terroristic activities. This is in large part a result of the US Patriot Act that was passed after the attacks of September 11th, 2001. Funds need to come from some sort of an account that has documentation that can be provided to verify its origins.
If these 5 things are avoided, you are most likely on the fast track to a full loan approval that and a successful loan closing. If you have any questions, I can be reached below.