Why won't they fund my loan? Common Red Flags

Someone had asked me once to identify all of the reasons that a lender might find to not fund a particular loan.  He said review it and tell me what are the issues that would be raised.   So here is the good list of those reasons for a potential denial of a loan.  This can help borrowers identify what the would assist them in obtaining a loan.   I hope it helps those overcome those issues and create successful transactions for true long term homeownership.

Link to Fannie Mae Common Red Flags

Common Red Flags  

Resources to Help You Combat Mortgage Fraud 

The following is a list of Common Red Flags that may indicate mortgage fraud.

Inconsistencies in the loan file are often a tip off that the file contains misrepresentations. The presence of one or more of these red flags in a file does not necessarily mean that there was fraudulent intent. However, several red flags in a file may signal a fraudulent transaction.

High-level Red Flags

Social Security number discrepancies within the loan file

Address discrepancies within the loan file

Verifications addressed to a specific party's attention

Verifications completed on the same day they were ordered

Verifications completed on weekend or holiday

Documentation includes deletions, correction fluid, or other alteration

Numbers on the documentation appear to be "squeezed" due to alteration

Different handwriting or type styles within a document

Excessive number of AUS submissions

Mortgage Application

Significant or contradictory changes from handwritten to typed application

Unsigned or undated application

Employer's address shown only as a post office box

Loan purpose is cash-out refinance on a recently acquired property

Buyer currently resides in subject property

Same telephone number for applicant and employer

Extreme payment shock may signal straw buyer and/or inflated income

Purchaser of investment property doesn't own residence

Sales Contract

Non arms-length transaction: seller is real estate broker, relative, employer, etc.

Seller is not currently reflected on title

Purchaser is not the applicant

Purchaser(s) deleted from/added to sales contract

No real estate agent is involved

Power of Attorney is used

Second mortgage is indicated, but not disclosed on the application

Earnest money deposit equals the entire down payment, or is an odd amount

Multiple deposit checks have inconsistent dates, i.e., #303 dated 10/1, #299 dated 11/1

Name and/or address on earnest money deposit check differ from buyer

Real estate commission is excessive

Contract dated after credit documents

Contract is "boiler plate" with limited fill-in-the-blank terms, not reflective of a true negotiation

Credit Report

No credit history or "thin" credit files

Invalid Social Security number or variance from that on other documents

Duplicate Social Security number or additional user of Social Security number

Recently issued Social Security number

Liabilities shown on credit report that are not on mortgage application

Length of established credit is not consistent with applicant's age

Credit patterns are inconsistent with income & lifestyle

All trade lines opened at the same time

Authorized user accounts have superior payment histories

Significant differences between original and new or supplemental credit reports

Also Known As (AKA) or Doing Business As (DBA) indicated

Numerous recent inquiries

Missing pages and/or supplements

Employment discrepancies

Social Security alerts

Employment and Income Documentation

Applicant's job title is generic, e.g., "manager," "Vice President"

Employer's address is a post office box, the property address, or applicant's current residence

Applicant's residence is (will be) in location remote from employer

Employer name is similar to a party to the transaction, e.g., utilizes applicant's initials

Employer unable to be contacted

Year-to-date or past-year earnings are even dollar amounts

Withholding not calculated correctly (check FICA tables)

Withholding totals don't foot from pay advice to pay advice

Pay period dates overlap and/or don't correspond with other documentation

Abnormalities in paycheck numbering

Handwritten VOE, pay stubs, or W-2 forms

W-2 form presented is not the employee's copy

Employer's identification number has a format other than 12-3456789

Income appears to be out of line with type of employment

Self-employed applicant does not make estimated tax payments

Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed

Tax returns not signed or dated

High income applicant without paid preparer

Paid preparer signs taxpayer's copy of tax returns

Interest and dividend income don't substantiate assets

Applicant reports substantial income but has no cash in bank

Large increase in housing expense

Reasonableness test: income appears to be out of line with type of employment, applicant age, education and/or lifestyle

Asset Documentation

Down payment source is other than deposits (gift, sale of personal property)

Applicant's salary doesn't support savings on deposit

Applicant doesn't utilize traditional banking institutions

Pattern of loyalty to financial institutions other than the subject lender

Balances are greater than the FDIC, SIPC insured limits

High asset applicant's investments are not diversified

Excessive balance maintained in checking account

Dates of bank statements are unusual or out of sequence

Recently deposited funds without a plausible paper-trail or explanation

Bank account ownership includes unknown parties

Balances verified as even dollar amounts

Two-month average balance is equal to present balance

Source of earnest money is not apparent

Earnest money isn't reflected in account withdrawals

Earnest money is from a bank or account with no relationship to the applicant

Bank statements do not reflect deposits consistent with income

Reasonableness Test: Assets appear to be out of line with type of employment, applicant age, education and/or lifestyle

Appraisal

Appraisal ordered by a party to the transaction

Occupant shown to be tenant or unknown

Owner is someone other than seller shown on sales contract

Appraisal indicates transaction is a refinance, but other documentation reflects a purchase

Purchase price is substantially higher than predominant market value

Purchase price is substantially lower than predominant market value

Subject property obsolescence is minimized

Large positive adjustments made to comparable properties

Comparables' sales prices don't bracket the subject's value

Comparable sales are not similar in style, size and amenity

Dated sales used as comparable sales

New construction / Condo conversion: All comparable sales located in subject development

Comparable properties are a significant distance from the subject, or located across neighborhood boundaries (main arteries, waterways, etc.)

Map scale distorts distance of comparable properties

"For Rent" sign appears in photographs

Photos appear to be taken from an awkward or unusual standpoint

Address reflected in photos does not match property address

Weather conditions in photos inconsistent with average marketing time, date of appraisal

Appraisal dated before sales contract

Significant appreciation in short period of time

Prior sales are listed for subject and/or comparables without adequate explanation

Title

Prepared for and/or mailed to a party other than the lender

Evidence of financial strain may indicate a compromised sale transaction (flip, foreclosure rescue, straw buyer refinance, etc.), or might suggest undisclosed credit problems in the case of a refinance

Income tax, judgments or similar liens recorded

Delinquent property taxes

Notice of default or modification agreement recorded

Seller not on title

Seller owned property for short time

Buyer has pre-existing financial interest in the property

Date and amount of existing encumbrances don't make sense

Chain of title includes an interested party such as realtor or appraiser

Buyer and seller have similar names (property flips often utilize family members as straw buyers)

Owner Occupancy

Purchase Transactions:

Real estate listed on application, yet applicant is a renter

Applicant intends to lease current residence

Significant or unrealistic commute distance

Applicant is downgrading from a larger or more expensive house

Sales contract is subject to an existing lease

Occupancy affidavits reflect applicant does not intend to occupy

New homeowner's insurance is a rental policy (declarations page)

Refinance Transactions:

Rental property listed on application is more expensive than subject property

Different mailing address on applicant's bank statements, pay advices, etc.

Different address reported on credit report

Significant or unrealistic commute distance

Appraisal reflects vacant or tenant occupancy

Occupancy affidavits reflect applicant does not intend to occupy

Homeowner's insurance is a rental policy (declarations page)

Reverse directory does not disclose subject property address

HUD-1 Settlement Statement

Borrower or seller name is different than on sales contract and title

Sales price is inconsistent with contract, loan approval and/or appraisal

Excessive earnest money or builder deposit

Earnest money deposit is inconsistent with sales contract and/or application

Payouts to unknown parties

Refinance pays off previously undisclosed liens

Excessive sales commissions

Excessive fees and/or points

Seller-paid closing costs, especially for purchaser with sufficient assets for down payment

Cash proceeds to borrower are inconsistent with final application and loan approval

Foreclosure Rescue Red Flags

The borrower was advised by a foreclosure assistance consultant that they       should avoid contact with their servicer

The borrower has paid someone to negotiate with the servicer on their behalf

The borrower states that they are sending their mortgage payments to a third party

Borrower receives a purchase offer that is greater than the asking price

Borrower states that they will be renting back from new owner

Cash-back at closing to the delinquent borrower, or disbursements that have not been expressly approved by the servicer

The borrower has quit claimed title to a third party at the advice of a foreclosure assistance consultant

Short Sale Fraud Red Flags

Sudden default, no workout discussions, and immediate offer at short sale price

Ambiguous or conflicting reasons for default

Short sale offer is from a related party

Link to Fannie Mae Common Red Flags