After much time and effort, a willing buyer and a willing seller have been brought together. The buyer seems to have a good enough credit score and income to purchase the house. The loan is submitted to the lender. Then the bad news is received, the loan was declined. What happened? Here are the 5 top deal killers in ascending order:
Number 5 Not enough Assets On the surface, the borrower seems to have enough money to qualify for either a conventional loan or FHA. The loan is declined because the underwriter wants more. Even though the buyer meets conventional or FHA requirements a lender can always demand more. This is especially true when there is something in the borrower’s credit report that bothers the underwriter, which bring us to:
Number 4 Credit History The buyer may have a credit score which qualifies under any guideline. Under FHA guidelines, collection accounts do not have to be paid off. If the underwriter feels uneasy about the credit history due to collection accounts or high credit balances, the underwriter may still deny the loan or insist collection accounts be paid. Just because a borrower has a good enough credit score, it does not mean that the credit history will not be a problem.
Number 3 Too Many Deductions A buyer’s W-2 and pay stubs show more than enough income to qualify for the mortgage. Lenders will also look at the tax return. If the borrower is taking itemized deductions for unreimbursed expenses such as travel, dry cleaning, etc, the underwriter will deduct those items from the borrower’s income. If the deductions are big enough, the borrower’s income may actually not be enough. This is also true if a wage earner reports a side business and takes a business loss on the tax return. This may also drop the borrower’s income low enough to not qualify. The lesson here is to ask the buyer if they are reporting unreimbursed expenses on their tax return or have business losses.
Number 2 Declining Market We all know that under FHA guidelines, the loan to value (LTV) can be up to 96.5%. A lender may decline a loan even if the LTV is below that if the lender determines the property is in a declining market. This is also true for conventional loans that seemingly qualify. Each lender has its own definition of a declining market. Some lenders will put out lists of which areas it determines is a declining market. For some lenders, that essentially means the entire country. Also, if the property is in a declining market, the underwriter may require an appraisal be performed by an appraisal management company or require a second appraisal, which brings us to:
Number 1 The Appraisal You knew this was coming. Appraisal problems are not limited to low appraisals. There are other reasons an appraisal may kill the purchase. If the appraiser lists repairs that must be made, whether they are structural or not, that can be a problem. The appraisal may reveal health problems such as mold. The underwriter may not like an appraisal and insist on better comps or more comps. An appraisal review by the lender can knock down the value. With all these appraisal traps, we must be sure that the appraiser has accurate information when doing the appraisal. Here is but one example. Make sure the appraiser has the correct name of the current owner. If the contract that was submitted to the underwriter has a different owner than the one listed on the appraisal, it will raise all sorts of red flags. If it does not kill the purchase, it will surely slow down the approval process while this is explained.
As you can see, there are all sorts of trap doors and pitfalls that can make a seemingly slam dunk deal go sour. Sometimes, this can be corrected by switching lenders. One lender may tolerate items that another will not. That is why a pre-approval letter from a mortgage broker has very little meaning. Until you see all of the borrower’s information and submit it to a lender, you can never be sure a purchase will close.
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