Having a mortgage loan denied at closing is the worst and is much worse than a denial at the pre-approval stage. Although both denials hurt, each one requires a different game plan. Whether in the beginning or end, reasons for a mortgage loan denial may include credit score drop, property issues, fraud, job loss or change, undisclosed debt, and more. Most importantly, we explain what to avoid and what to do if a mortgage loan is denied at closing or before.
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
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.
Can a Contingency Sale Cause a Denial at Closing?
Buying a property while simultaneously selling another property is called a contingent sale. For any of the reasons above, the buyer’s sale could be denied. There are many other reasons that the sale could be delayed. When the buyer’s purchase depends on the other sale, the risks are much higher. For this reason, especially in hot markets, sellers will not accept a contingency sale.
How Asset Verification Can Cause a Mortgage Denial
Down payment sources could vary widely. The delay or cancellation of a buyer’s sale could be a big reason for a last-second loss of assets. Without the sale, the buyer may not have enough down payment funds. Then, the other property would have to be included in the buyer’s debt ratio. Often, the buyer depends on receiving assets from another sale, borrowing from a retirement account, or another source that ends up not coming through.
Don’t think these issues only apply to buyers obtaining a mortgage. Cash buyers are also susceptible to many of these reasons. Experienced Realtors know that cash sales are not a guarantee. There are usually contingencies in the background, unknown by the sellers and even the buyer’s agent. That’s why it is essential to verify the cash sale is real and what everyone expects. Often buyers think they should pay cash when there are better financing solutions. Check out this article, “Are you sure you want to be a cash buyer.”
Game Plan for Mortgage Loan Denied at Closing
At this point, a denial causes severe problems for the buyer and seller. First of all, a buyer would lose money spent on the appraisal, inspections, and maybe the earnest money deposit. Plus, a canceled closing could leave a buyer homeless. Usually, a first-time buyer has submitted their notice to the landlord. What if the buyer sold their previous home too? All of these last-minute scenarios cause chaos and confusion in a buyer’s life. So, what needs to be done depends on the reason, but something needs to be done quickly!
At this point, there’s a good reason to be upset. Try to stay calm and gather as much information as possible. What is the specific reason for the denial? Is there a possible quick solution? If there is a way to stay with the current lender for a quick resolution, that is usually the fastest option, but if there is no solution with the current lender, it is time for quick research. A few ideas include:
- Discuss the situation with your real estate agent
- Google the issue
- Ask the lender for a referral
Often, your realtor and loan officer will be the most knowledgeable of your scenario. Ask if there is a lender who specializes in the area of mortgage loan denial. Also, Google the topic for buyer education and to determine who is the expert in this area. Many buyers find this website for our articles which share solutions like this one.
Next, it is critical to have a detailed and accurate discussion with a new lender. In addition to describing the situation to the new lender, it is beneficial to provide all documentation immediately. The entire package of loan documentation should be provided. The borrowers may provide documentation, or the previous lender can transfer the documentation with the borrower’s consent. Another key piece of information includes the appraisal. Some programs such as FHA and VA allow the lender to transfer the appraisal. In some cases, the new lender can use a conventional or USDA appraisal.
Even though this is step 3, it should be completed simultaneously with step 1. This includes the buyer’s agent requesting a closing extension from the seller’s listing agent. Depending on the nature of the issue, the buyer’s agent may or may not share full details for the delay. Also, the seller may not approve the request for a contract extension.
At this point, it is essential to have a realtor experienced in problem-solving and negotiating. If an extension is granted, speed is vital. Communication is always key, but in the case of a last-second loan denial, there must be an abundance of communication.
What if a Mortgage Loan Denied at Closing is a Dead End?
So, what if the mortgage loan denial has no remedy? That’s where a good loan officer should provide a buyer with a plan and timeline for buying again. If the issue is strictly property related, the good news is the buyer’s file may be duplicated for another purchase. Although, the fees paid for the appraisal, inspections, etc. are usually lost.
But, in the case where a borrower is denied for credit, income, assets, or debt ratio, a plan may be devised.
Common Solutions for Recently Denied Buyers
- Improve credit score
- Lower debt to income ratio
- Save up a down payment or reserves
- More time in the current job
Each buyer’s scenario is different. Even though a buyer’s credit score needs to improve, there could be many factors affecting the scores. If a debt ratio is too high, there are also tactics for lowering the ratio. A strategy may be developed to attack the right debts to reduce the ratio quickly. Although there are some great low to no down payment loans available, some buyers need reserves in the bank to qualify. Reasons are usually a higher debt ratio or a lower credit score, but with a little savings, a buyer could qualify quickly.
Other issues include not enough time on the job. As mentioned above, becoming a brand new commissioned or 1099 income buyer is an issue. Many buyers do not realize the importance of this change, but the minimum amount of time needed on commission or self-employed is one year. So, just switching over obviously causes an issue.
If you have a denial, contact OVM Financial for a no-cost second opinion. We promise quick, expert service to you.