Reasons For Mortgage Loan Denial
In a home purchase, there are so many things that can go wrong. We will mention the most popular issues. Some are related to the buyer, and some are seller related. Either way, they’re all issues and need to be worked out as quickly as possible. The probability of a last-minute denial at closing increases when one of the parties procrastinates. We cannot stress enough how everything possible should be completed very early in the purchase process. Therefore, if there are issues, they are known early. Even if the result is denial, it is much better for all parties to know this in advance instead of the day before closing.
Popular Last Second Denial Reasons
- Title issues
- Appraisal value or property type
- Inspection issues
- Loss or change of job
- Credit issues
- Debt to income ratio
- Issues on buyer’s sale
- Verification of assets
Property Related Issues
A buyer cannot do a lot about the first three items on the list as they are property related. Although, there are steps to improve the chances of success. These include the buyer side doing their homework up-front. The buyer’s agent could request property related documentation such as existing survey, flood insurance information, title insurance policy, condo documents, etc. More documentation allows the buyer, buyer’s agent, and lender to perform their steps earlier and more thoroughly. Also, it is essential to complete the inspections and appraisal early in the process. Again, avoiding last minute issues and allows for potential renegotiation or repair requests.
Will a Job Change Cause a Mortgage Denial?
In most cases, a buyer cannot help losing a job in the case of layoffs or downsizing, but we have seen buyers change jobs at the last second. This should absolutely be avoided at all costs. At a minimum, there would be a delay in closing so the new position can be verified and possibly 30 days of pay stubs on the new job. Sometimes a buyer job change may result in a denial. Examples include changing from an hourly or salaried W2 job to a commission or 1099 job. In these cases, brand new commission income or 1099 may not count. Our best advice is to stay at your current job.
Mortgage Loan Denied for Credit or Debt to Income Issues
Most of the time, these last second issues are avoidable. At least, they may be known very early in the process. Reasons for last second denials usually result from borrower or lender procrastination. If the documentation is provided early, as it should be, a denial at the last second for credit or debt ratio would be rare.
When credit or debt to income ratios arise, there are potential solutions. Some lenders and programs allow buyers to qualify at higher debt ratios. Conventional loans allow up to 50%, FHA and VA possibly over 55% and USDA potentially up to 46%. The solution may be as simple as using a lender which allows the higher ratios.
Common last second credit issues result from expiring credit reports. Once the new credit report is pulled, the scores may be lower for many reasons. One includes borrowers paying off old collections which may dramatically lower credit scores. Sometimes buyers go under contract in hopes that a credit score will increase enough during the process to qualify. Regretfully, the seller often does not know this is happening. Thus, it is a form of misrepresentation by the buyer, and the chances of closing issues are high when rolling the dice like this.