You’re feeling great – just found the house of your dreams, and now the bank is hard at work to make the mortgage work. And then, disaster strikes. You get the call that something has gone horribly wrong, and the mortgage isn’t going to work out. You’re devastated. What exactly went wrong? At Exodus, your Denver moving company, we’ve seen a lot of moves fall through due to mortgage issues.
It can be hard to figure it all out. There are numerous reasons problems can arise, most of them during the underwriting process. Underwriting is simply the process lenders go through in order to decide if the risk is acceptable and that the loan meets the minimum guidelines set out by the lender. And if the loan relies on any secondary program such as Freddie Mac or FHA, the loan is checked against their minimum requirements as well. But there’s good news: most problems can be avoided.
Let’s take a look at what can go wrong so that you can be prepared before your mortgage goes through this process. Here are some tips from your favorite Denver moving company (and don’t forget to call us for a free moving quote!).
Different Stages, Different Problems
There are three stages in which problems can crop up. The first is during the application process. These are problems you’re probably familiar with, the most common being a low credit score. You won’t even get the chance to progress to the other stages of the loan process – you’ll be denied right off the bat.
Then comes the underwriting process. This is the most common stage for problems to show themselves. Why? Because it is the most in-depth part of the process. The underwriter is picking everything apart in order to expose every last detail, which is done to spare the problems from appearing at the last minute.
Sometimes, even the best underwriters aren’t prepared for the closing phase, when other problems can arise. These lie simply in paperwork problems, which the closing agent can easily take care of. If you have a problem during the closing phase, don’t worry. These problems never make it so you lose your mortgage altogether. If you’ve made it to the closing stage, you’re pretty much safe.
What To Worry About During The Underwriting Phase
So what can go wrong during the underwriting process? Here are ten common issues that can halt the entire deal.
- Credit. Yes, your credit score earned you pre-approval, but during the underwriting process, they’re reviewing your credit history in depth. They will be looking to see how you’ve treated loans in the past and how often you made late payments. They’ll likely request a letter explaining such behavior from the borrower(s). If you have any late payments they’ll find out, and it might ruin your chances for the loan altogether.
- Pathologically late. Speaking of making late payments, what happens if you have a problem with making payments in general? People who have an extensive history of making late payments will be scrutinized – other mortgages, credit card debt, student loans, etc – and might end up hurting your chances at approval. The logic is simple enough to follow – you are an enormous risk when your credit history displays a pattern of late payments.
- Income. This seems pretty straightforward – if you only make a teacher’s salary, you can’t afford that multi-million dollar home. The underwriter will perform a series of calculations to see what size loan you can afford based on your income and the other debts you’re currently responsible for, and if the loan you’re trying to get qualifies. To better your odds, be sure to write down every source of income you have.
- Debt-to-income ratio. This is unfortunately a common problem underwriters find. They review your credit history, income, and the debt you are responsible for, and they determine that you have much more debt than you can afford already. They determine this using the DTI, or debt-to-income ratio, a comparison of your income and the money you spend paying back your debt. They are looking for no more than a DTI ratio of 36% to 43%.
- Cash reserves. Sometimes you’ll be required to show that you have money in the bank beyond down payment and closing costs. These additional funds are referred to as cash reserves, and they are supposed to go towards the first couple of mortgage payments. The good news is this is only a requirement of certain lenders. Those lenders who require it won’t allow you to continue acquiring the loan if you don’t have a cash reserve.
- Employment. Most lenders want to see at least two years of employment consecutively before they’ll approve you for the loan, but like the cash reserve rule, this can vary. Some lenders are a bit more lenient than others, and if they have a problem with your employment history, they’ll simply ask for a letter of explanation. Others will flat out deny the loan.
- Funds not properly sourced or seasoned. Sometimes, the lender will want to see that the money you’re providing for your down payment can be sourced, which means they want to see where the money is coming from. Another requirement can sometimes be that your funds are seasoned, meaning the money has been in the bank for a specific period of time.
- Low equity. This applies to those looking to refinance an existing mortgage. In this case, a borrower will think their home is worth more than it actually is.
- Low appraisal. For those looking for a new mortgage, the home needs to be worth the amount that has been agreed upon. An appraiser will determine the market value, and the underwriter will compare this to the figure agreed upon by the buyer and seller. If the market value is less than the purchase price, negotiations must take place. Either the buyer has to pay the difference out-of-pocket (not a good idea in most cases), or the seller must come down on their price. If they cannot agree, the loan will be denied.
- Missing paperwork. These problems don’t always cause the loan to be denied, but they certainly delay the process. You need to be sure you are submitting all required paperwork in a timely manner, and that the paperwork is complete. One example: lenders will ask for a bank statement. You cannot simply print out a bank statement off of your computer at home. You’ll need an official bank statement printed by the bank itself. Be sure that the statement includes everything the lender is asking for in order to keep closing on-track.
There are other issues that can pop up, but these are the most common problems. The more you have prepared in advance, the more likely your loan will close without a hitch.Once you’ve closed, you can count on Exodus Moving & Storage – your Denver moving company – to take the headache out of moving into your new home. Contact us today for a free moving quote!