9 Reasons Your New Mortgage Can Fall Through
One of the first steps in your homebuying journey is securing preapproval for a mortgage. Preapproval is relatively simple to get. You give a lender estimates of your income, savings, and debt. They check your credit and tell you how large a mortgage you will likely qualify for.
But many first-time homebuyers don’t realize that getting preapproved isn’t a guarantee of a home loan. You still have to formally apply, provide documentation, and sign your closing documents. That means that until closing day, you can be denied a loan, even if you were preapproved. Here are eight reasons why.
1. You Lied to Your Lender During Preapproval
This one might seem obvious, but there is absolutely no benefit to lying to a mortgage lender. People lie about their income, assets, employment statuses, and more — all in the name of securing a better loan. But lying to secure a mortgage is a crime.
Your lender may not catch your lies during preapproval. However, you’re required to provide documentation when you formally apply for the loan. That means you will almost definitely be caught in any lies you tell. Instead of committing fraud, talk honestly with your lender about your situation. They likely know of options you haven’t heard of. Let them help you find one that works for you.
2. You Opened a New Line of Credit or Made a Big Purchase on Credit
Your mortgage lender will check your credit during preapproval and right before closing. So, in between, don’t do anything that could disrupt your score. One of the easiest ways to hurt it is to throw off your debt-to-income ratio.
Lenders want to know that you earn enough to make consistent payments on your debts. A healthy debt-to-income ratio assures them of this. So, if you go out and get a new car loan or make a big purchase with your credit card, they have to reassess everything. Applying for a new credit card can also cause your score to dip. If it is at all possible, wait on these things. And if it’s not possible to wait, talk with your mortgage lender immediately.
3. You Closed Out a Loan or Credit Card
Paying off debts may help your credit. But you need to be careful about how you do it. An important part of your credit score is how long you’ve maintained a steady line of credit. If you close out an account, that credit history is removed from your report. And this can cause your score to drop.
Similarly, making regular payments on student loans or a car loan shows that you are dependable with your finances. Because of this, you can experience a slight dip in your credit score after you pay off a loan. Your score will usually recover quickly. However, if you do this right before you close on a house, your score may not have time to recover. If it is possible, keep making your regular payments on time, but wait to finish out your loan.
4. Your Appraisal Came in Low
Before lenders approve a mortgage, they have the house in question appraised. This is different from your home inspection, which is done to find anything wrong with the house. The appraisal is looking at the value of your house. Lenders need to know that if you default on your loan, they’ll be able to sell the house and get their money back. So, they won’t give you a loan for more than the house is worth.
Now, if the house is appraised at a lower value than what you offered, you may still get your loan. The seller may be willing to drop the price or split the difference. However, in a hot market, the seller may not be willing to make concessions. If you can’t cover the difference, you won’t be approved.
5. You Moved a Large Amount of Money into or out of Your Account
Before they give you a loan, mortgage lenders will look for any and all abnormalities. If they see you moving mysterious, large sums of money in or out of your bank account, they get suspicious. They wonder if someone’s giving you an off-the-books loan, which would impact your debt-to-income ratio. They then have to investigate, which can delay closing. To delay a closing, the seller has to agree to an extension. And if they don’t, you can lose the house.
If possible, avoid moving large sums of money right before you close on a house. Otherwise, prepare to show documented proof of what the money’s for and where it came from. If it’s a gift, ask the giver to write a letter stating that it is just a gift. And, of course, it’s always best to give the lender advance notice of the change if at all possible.
6. You Changed the Source of Your Down Payment
When you apply for a mortgage, the lender will ask about the source of your down payment. They need to know that you have secure funding and that it isn’t coming from another loan. If you change the source of your down payment at the last minute, your lender has to vet it. And as discussed above, this can lead to a closing delay, which could mean losing the house.
If a generous relative offers to help with your down payment at the last minute, that’s great. But ask if they can delay their gift until after you’ve closed. Use your original funding source to make the down payment. Then, let the gift replenish your bank account so you can buy new furniture or whatever else you may need for the new house.
(Note: Down payment gifts are OK if they’re offered before you start applying for your loan. Ask the giver to write a gift letter confirming the amount and that it is a gift. Make sure to also document the money received and who gave it.)
7. Your Employment Changed
It’s no surprise that losing your job can cause you to lose your home loan. After all, proving your income is a major part of being approved for a mortgage. However, many people don’t realize that switching jobs can also impact your loan approval.
Lenders generally require that you have two years of stable employment. They also require that you provide pay stubs to prove your income. If you switch jobs, you interrupt your streak of stable employment. And those pay stubs are no longer relevant because they don’t prove anything about your new employer’s ability to pay you.
8. Someone Made Paperwork Errors
Simple errors in your paperwork can easily delay your closing. It’s important that every name, address, and number be accurate. Ask to see your paperwork the day before closing so you can verify that these types of details are correct. And if, at any time in the homebuying process, you see something that doesn’t look right, bring it up. Realtors, lenders, and brokers are all human beings who make mistakes. Better to ask a silly question than to lose the house.
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