Learn What Can Go Wrong in Underwriting
How an Underwriter Can Reject Your Mortgage Loan
Home buyers who have been preapproved have the hardest time understanding why they can get rejected in underwriting. They believe that because a lender gave them a preapproval letter that they were qualified and able to buy a home. A preapproval letter means they appear qualified but until underwriting examines the file and carefully scrutinizes their personal situation, there are many ways a previously approved borrower can get kicked out of underwriting without an approval.
Most Buyers Get Approved, But Some Don't
The fact that most home buyers are unaware of things that can go wrong in underwriting is probably a benefit in a way, because they don't know enough to be nervous. Most buyers get approved, but some do not. Those who are rejected tend to take it very hard, especially if they were unprepared for that news. They aren't often told that it's possible they won't get the mortgage. Their real estate agent doesn't know, and the lender tends to hope for the best.
The Things That Could Impede Your Loan
Borrowers often assume that because they are current on all revolving debt payments that they have excellent credit. They don't think about such restrictions as debt-to-income ratios and back-end ratios, and how their last 10 years of credit reporting might affect a FICO score. Following are some of the things that can go wrong in underwriting and how that can affect a borrower's ability to be approved for the mortgage.
A Low Appraisal
The number one thing that can go wrong in underwriting is the appraisal. Either the assessment of value might result in a low appraisal or the underwriter might call for a review appraisal by another appraiser just prior to approval. There are ways to contest a low appraisal, but most of the time the appraiser will win. If the buyer doesn't have the money to pay the difference and the seller refuses to lower the price, the pending sale might cancel.
Moreover, if the first appraisal reflects the purchase price but the second appraisal is low, the file most likely will be rejected by the underwriter. The values will be considered non-conforming. Some types of loans prohibit a third appraisal by assigning a case number, so it's not like a borrower can simply apply at a different lender and pay for a new appraisal.
The Property Might Not Qualify for the Mortgage
High on the list of other things that can go wrong in underwriting is the fact that the property itself might not qualify for the mortgage. The appraiser can indicate that certain structures are non-conforming or the appraiser can't find a permit for a remodel, or non-permitted improvements could require extensive repairs to bring the home up to code, or the home could be deemed uninhabitable.
Unexplained Gaps in Employment History and Other Job-Related Factors
Another major concern about things that can go wrong in underwriting concerns employment history. Do unexplained gaps exist in the borrower's employment history? Has the borrower changed jobs within the past 2 years and the new position does not fall within the same line of work?
Is the borrower a temporary worker and not yet made permanent? Is the company likely to layoff employees in the near future? Recently an underwriter informed a borrower that her loan would be rejected if she could not get a letter from her employer, the State of California, guaranteeing that she will not be furloughed over the next 3 years. Pretty much impossible.
All of the income used to qualify for the mortgage needs to be documented by the employer. If an employee receives bonuses, commissions or regular overtime that is not guaranteed, that borrower might not be allowed to use that additional income for qualification purposes.
Other Unexpected Factors
Some of the other factors that have caused things to go wrong in underwriting are often a complete surprise to the borrower. The borrower might not realize the extent of certain types of problems and how they can affect a mortgage.
Another borrower was ready to emerge from underwriting when he suddenly discovered that he was not yet divorced. He thought his divorce had been finalized but it was not. His soon to be ex-wife refused to sign a quitclaim deed, so the borrower could not get approved for the mortgage.
Another borrower discovered a judgment against him suddenly appeared that was recorded in another state. Back in the old days, before the digital age and improved communication, an item like this would have been non-discoverable. Not today.
A borrower who has not filed a tax return or has not filed an extension and paid the taxes due, if any, will most likely not make it out underwriting, either.
Short Sale or Foreclosure
If you've had a short sale or a foreclosure within a certain time period, that could be enough to kick your file out of underwriting. Generally, FHA lenders are more lenient about the time required to buy another home after a short sale or foreclosure, but conventional lenders can reject your underwriting file for those reasons if they so desire. Not to mention, some short sales are reported in error as a foreclosure.
Your best bet to avoid dealing with things that can go wrong in underwriting is to disclose your entire financial history to the lender prior to your initial loan preapproval. Ask the lender to check your credit file. File your tax returns, keep clean credit and do not spend your savings nor add to credit card debt between the time you make an offer and get approved by underwriting.
At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.