Monday, December 29, 2014

Why some mortgages get suddenly canceled

You and the home seller put it to paper that you are buying your new palace. You put a big deposit down. You shell out $1,000 for an appraisal and home inspection. After all of the ridiculous mounds of documentation you supplied and seemingly endless questions answered, your loan officer finally calls to tell you that your loan is approved.

You are so excited! Proud as a peacock, you tell your relatives, friends and co-workers that this family is moving up in this world. Expectations are in place that this is a done deal. The movers are scheduled. Then, you get a phone call out of nowhere from your lender telling you the loan is not funding -- in other words, that you can't get the loan after all.

Isn't a deal a deal? How can this be that one minute you are good to go and the next minute it's a dead deal. Why wasn't I told about this before? Can we save this?

Although there are no documented statistics or lender reporting requirements, this 11th hour nightmare happens more often than you might think. This is usually both preventable and fixable.

The most common prior-to-funding fiasco is when a borrower takes out additional credit after the initial credit report is run by the loan originator. The income and debt calculations used to grant credit to borrowers is always based upon the initial credit report. Most lenders run a backup credit report or have credit monitoring systems that trigger an alert if the borrowers open any new accounts or add debt to their credit cards, for example. If a borrower applied for credit or added a significant amount of additional debt, the credit scores can worsen as well. A reduced middle credit score can separately trigger a higher cost to the loan or if it gets below the line, a denial.

It doesn't matter if you need to buy new furniture for your new digs, do not do anything excessive. Your normal patterns of purchasing groceries, gasoline, etc., are highly unlikely to affect your qualifying ratios or your credit scores.

Another gotcha is property-related funding conditions. Perhaps the lender requires proof of a permit for a room addition. If one does not exist, it's a scramble to get the local municipal authority to inspect, approve and issue a permit in a timely manner.

Lenders always call to verify your employment prior to funding. If you are planning on resigning and taking another position, wait until after the loan closes. And separately, hold your tongue at work even if your boss is a bozo. Don't get yourself fired, period, whether it's before or after funding.

Very recently I had a shocker. The lender approved the loan. Two separate mortgage insurance companies declined the loan. This is rare but this can happen as different underwriters may interpret credit and income differently. Luckily, the third mortgage insurance company approved the loan and the deal was done.


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