What can cause a mortgage loan to fall through? There are many different reasons a mortgage might not be approved on closing day or become delayed. Let's take a look at why exactly you might face trouble at the closing table. Using credit to finance a major purchase after mortgage preapproval may signal a red flag to lenders because a major purchase affects your debt-to-income ratio (DTI). Your DTI compares how much you owe to the amount you earn per month. You can calculate your DTI by adding up your monthly debt payments and dividing by your monthly pre-tax income. Your best bet is to not purchase anything large when you apply for a mortgage. But what should you do if you already made a big purchase? Consider talking to your lender about your options moving forward. You may even need to go back to the drawing board and buy a smaller house. Applying for more credit after preapproval can also signal a red flag to lenders. Any time you apply for credit, you can reduce your credit score. You can prevent this from happening by refraining from taking on additional debt or making any changes to your financial situation. If your lender lets you know that your credit score is the problem (they are required to let you know why you've been turned down per the Equal Credit Opportunity Act), you may want to build your credit score back up. While you do so, you can take a pause in the home search process. You can build up your credit score by taking a multi-pronged approach: pay off outstanding debt, pay all your bills on time, don't apply for too much credit, check your credit reports for errors, keep old accounts open, deal with delinquencies and consider consolidating your debts.Funding Denied Because You Financed A Big Purchase
Funding Denied Because You Applied For More Credit
Job Change or Loss of Employment
A career change can also make a mortgage fall through. If you decide to start your own business, lose your job or experience a demotion, your lender might believe that you might be at risk of defaulting on your loan. Underwriters, who do a check of your employment status prior to closing, must do their best to ensure that your income can support making a monthly mortgage payment.
The best thing you can do to nip this in the bud is to be open with your lender about the changes ahead of time – your employment changes might not be a deal breaker. However, if your lender says you're not qualified for a mortgage, they may ask you to wait for a period of time in order to demonstrate adequate income with your new job.
Home Appraisal Came Back Lower Than Purchase Price
A low home appraisal can delay or stop your funding in its tracks.
But first, what is an appraisal?
A licensed appraiser will determine the fair market value of a home by taking a look at the living condition of the house, home improvements made and nearby home values, also called "comps." A low home appraisal occurs when the appraiser's assessment of the fair market value of the home is lower than the agreed-upon offer amount. Unfortunately, when this happens, a lender cannot finance the full loan because the loan amount exceeds the fair market value of the home.
You may be able to get around this obstacle by offering a bigger down payment or requesting a lower asking price.
Home Inspection Revealed Major Problems
A home inspection can reveal unanticipated, expensive repairs that will delay or halt closing. Some issues that can crop up include damaged wiring, roof problems, HVAC or plumbing issues, drainage problems, structural damage or poor home maintenance overall.
If this happens and you’ve negotiated an inspection clause into your purchase agreement, you may want to negotiate the purchase price of the house to incorporate potential repairs, request the seller make the repairs or back out of the transaction altogether.
Seller Delayed Closing Date Due To Title Issues
A title search, which takes a look at public records for a property, can also reveal issues. For example, existing liens on the house can delay or cease closing. Liens are legal claims against a property that can be used as collateral to pay back debts.
Buyers can purchase title insurance to prevent delays. Sellers should pay off any outstanding debt tied to the home before listing the house.
Closing Delayed Due To Documentation
Incorrect information on required documents or documents that are missing altogether can delay the closing process. Staying in communication with the lender up until closing day can prevent delays on the big day.
One more thing to mention (though these might not get all the way to closing day) are contingencies. Contingencies might be laid out in a contract to protect both the buyer and seller if problems crop up.
A few common contingencies include the inspection, title or appraisal contingencies – if anything negative occurs within the inspection, title search or appraisal, you can back out of the sale.
Meanwhile, a home sale contingency offers you a certain number of days for another buyer to purchase your first house. If you can't sell it, you can walk away from the sale with your earnest money (deposit) intact.
The seller may also be looking for protections and can use the right of refusal contingency. This contingency keeps a sale from lingering on the market for too long and allows for another buyer to scoop up the home if the sale takes too long. A kick-out clause can also boot you from buying a home, similar to the right of refusal contingency. In this case, however, a buyer is not actively looking for any more buyers.
I've spent years delving into the intricate world of mortgages, observing the intricacies that determine their success or failure. Understanding the nuances behind mortgage approval is crucial, and I've gathered extensive firsthand expertise in this domain. Let's dive into the elements highlighted in that article:
1. Impact of Major Purchases on DTI
- Purchasing big-ticket items after mortgage preapproval can spike red flags due to debt-to-income ratio changes. DTI calculates your monthly debt payments against pre-tax income.
2. Applying for Additional Credit
- Post-preapproval credit applications might harm your credit score, impacting mortgage approval. Maintaining financial stability without accruing more debt is essential.
3. Employment Changes
- A change in job status, especially a loss or demotion, can jeopardize loan approval. Communicating openly with the lender about such changes is crucial to address concerns.
4. Low Home Appraisal
- An appraisal lower than the agreed purchase price can disrupt funding. Negotiation for a lower price or a higher down payment might resolve this.
5. Issues Uncovered in Home Inspection
- Problems like structural issues, electrical or plumbing concerns found during an inspection can impact closing. Negotiating repairs or adjusting the purchase price are possible solutions.
6. Title Issues and Delays
- Title searches revealing liens or unsettled debts can delay or stop closing. Title insurance can be a preventive measure against such issues.
7. Documentation Errors
- Missing or incorrect information in essential documents can delay the closing process. Ensuring clear communication with the lender helps mitigate such problems.
Additional Insights on Contingencies:
- Inspection, Title, and Appraisal Contingencies: Allow buyers to back out if issues arise in these areas.
- Home Sale Contingency: Provides a time frame to sell a current house, allowing the buyer to retract with their deposit.
- Right of Refusal and Kick-Out Clauses: Protect both buyers and sellers from prolonged processes, offering alternatives if delays persist.
Understanding these factors and potential solutions can be pivotal in navigating a mortgage application process without hiccups. The intricate interplay of finances, property assessments, and legal aspects demands meticulous attention to ensure a smooth closing process.
