As Mortgage Loan Professionals, we learn to deal with stressful issues that are a part of doing business in a government regulated industry. Over the years, I encountered so many different reasons why a loan didn’t close on time. Here are just a few reasons why a loan is delayed or gets declined.
Tax returns (in most cases) must be submitted for the last 2 or 3 years. The tax returns must be validated by the IRS. If Congress shuts the IRS down just before or just after the new year, the time frame to validate the returns, extends out. If the person owes money, the time frame could extend out even farther. Back in 2000, I used to drive to the IRS and have the IRS validate the returns if needed. In 2012, it took over 2 months to validate a tax return. Most (but not all) lenders now use a third party company to obtain an IRS form 4506T using an e-signature which speeds up the process. However, without the IRS open, it will delay the closing.
Most lenders will pull credit at the time of application and just before closing. The second pull is to make sure that the person didn’t borrow the money for the down payment, didn’t incur more debt (furniture, a car) etc. and/or to make sure the credit score is still the same or higher prior to selling it to another bank. As much as I can stress to a buyer to avoid using his/her credit, there are those few people who don’t listen. I’ve had loans fall through or delayed because my buyer wanted to refinance the car payment in order to save money. While lowering the payment is a good thing, lowering the credit score for new credit, is not. The way to solve this issue is to require the buyer to freeze the credit bureaus until the underwriter is ready to pull the credit again.
Title issues are usually cleared up prior to closing, however, no one knows his/her expiration date and there will come a time when the seller passes away during the process and the property must go through probate because a Will and Testament wasn’t done. I guess it would be a little intrusive to ask the seller, who is the beneficiary to the property in case of an accident. A fellow Loan Officer told me that a buyer and his wife were set to close (same last name) and then admitted to the closing Attorney that the two were not married and he did not intend to marry her in the future. The Attorney represents the lender at closing and had to report the information to the lender. The loan closed 30 days later after the man proposed marriage.
Government compliance changes can cause a delay. The government is not always willing to explain how to address the changes and lenders have to guess how to adhere to the changes. It takes a lot of tweaking and updating and waiting for instruction. The most recent change, TRID, will delay a closing for at least 3 days. Years ago, the lending industry shut down completely due to government intervention. I don’t disagree with some of the changes; I disagree with the way the government processes the changes.
Buyers who use the FHA 203k rehab program can cause delays by changing their mind on the work they want done to the house. Generally, it takes about 45 days to close these loans, but if the buyer decides on day 30 that he wants to change the flooring from carpet to wood and has to find a contractor, this will cause a delay in closing. It’s important to write up a plan and stick to it.
The valuation of the property can cause a delay in closing if the value of the property starts to decline due to recent foreclosures, new construction, or among other reasons. The seller must then decide if he/she wants to lower the sales price, otherwise the buyer must pay the down payment plus the difference between the new value and the sales price. New contracts must be typed up and signed, new loan documents must be updated and resent per government compliance which will delay the closing.
When applying for a mortgage loan, the buyer must supply the lender with at least 2 months of banking statements. Each month that goes by, another statement is needed. A buyer may have more than 1 bank and shares the money between each bank. If the buyer did not give information about the other bank during application and a deposit shows up on the known bank statement, then 3 things may happen: The deposit may or may not count towards the closing if being used as down payment money; Two months banking statements are needed from the other bank’; If the statement has another person on the account, a letter must be obtained from that person stating that the buyer has permission to use the money. Obtaining this information may delay the closing while waiting for copies of everything. It is better to divulge everything up front than to hide it. Bank statements with excessive Non-sufficient fund fees are usually not allowed and are usually a reason for declination of a loan.
A person will need to submit at least 30 days of paycheck stubs to a lender. Things we look for include but are not limited to: Making sure that the taxes taking out each pay period add up correctly; Child support/alimony payment deductions; Pay stub belongs to buyer; income matches information stated at application and didn’t include overtime/bonuses/commission etc.; Year to date income is consistent with time at employer and pay. If the buyer gave the wrong pay income, this may delay the loan while needing to add a co-borrower or decline the loan. Re-disclosure is required if adding a co-borrower.
Home owner’s insurance is required when borrowing money to buy a house. At the time of application, most buyers don’t know the cost of insurance. The lender must then guess the cost of insurance (usually based on several factors including credit score) and use that number as part of the calculation to qualify for a loan. However the lender may not know the history of the buyer and the buyer ends up obtaining insurance much higher than the estimated amount. This may require the buyer to pay down some credit cards to lower the debt to income ratio which will delay the closing. The buyer may also have to put more money down and/or obtain down payment assistance (if available) which will delay the closing.
Speaking of down payment assistance, homebuyer’s may qualify for down payment assistance programs. Each state, county and city has its own program. It’s important to use these programs at the beginning of the year, rather than in the fall when funds tend to run out. Closing in December may cause the loan to delay until January when funds are available again.
Other issues that can occur include but are not limited to: Job changes, inaccurate property information on contract, income changes, funds to close not available, inspection issues, termite/pest infestation, interest rate changes, closing cost changes, death in family, divorce, loss of employment, outdated power of attorney, unknown lien payoff of seller’s property, disputed credit account of buyer* etc.
*A buyer who disputes an account on his/her credit report must have the dispute removed prior to closing. Disputed accounts keep collection accounts from affecting the score negatively. Dropping the dispute may decrease the score resulting in a possible change to the loan program which may delay the closing or declining the loan.
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