Why Did My Home Mortgage Fall Through?
If you’ve ever had a home mortgage fall through, you know how frustrating it can be.
You’ve spent weeks – or even months – going through the application and approval process, only to have it all come crashing down at the last minute.
So, what went wrong? In most cases, it boils down to the mortgage underwiting process.
Mortgage underwriting is the process that lenders use to determine whether or not to approve a loan. It’s a complex process that considers several factors, including your credit score, employment history, and income.
In this article, we’ll examine the mortgage underwriting process and why it sometimes leads to home loans falling through.
1. Home appraisal process
The home appraisal process is a major component of the mortgage underwriting process. You see, a home appraisal is an independent evaluation of a property’s market value, and it’s a key factor in determining whether a home loan is approved.
The appraisal process begins with a licensed appraiser completing a thorough inspection of the property. They’ll look at factors such as square footage, number of bedrooms and bathrooms, the home’s age, and the home’s condition. They’ll also compare the property to other similar homes in the area and account for any special features that may add value.
Once the appraisal is complete, the final report will be given to the lender. If the property’s appraised value is lower than the loan amount, the loan will not be approved – or at the very least, it will have to be renegotiated. This is why the appraisal process is so important and why you should ensure you’re working with an experienced, professional appraiser who understands the local real estate market.
2. Credit score
Credit scores are another hugely important part of the mortgage process. Your credit score, credit history, and other financial profile play a big role in determining whether lenders will offer you a mortgage and what the terms may be.
A higher credit score will grant you access to better loan terms and maybe even a lower interest rate. A lower score, on the other hand, can make getting approved for a loan much more difficult and can even mean that you’ll be charged higher interest rates or even denied for a mortgage.
So, it’s important to check your credit score before starting the mortgage process, so you have time to take the necessary steps to improve it, if need be. Working with a credit specialist or credit counseling service can help you build a better credit score and better prepare you for the process of applying for a loan.
3. Debt-to-Income ratio
Debt-to-income ratio (DTI) is another important factor for lenders to consider when evaluating your home mortgage application. This ratio is the percentage of your gross monthly income that is devoted towards paying your monthly debts.
Generally, lenders prefer to keep this ratio below 45%. That’s a healthy ratio that shows lenders that you are responsible with your money and that you are likely to keep up with your payments.
The higher your DTI is, the less likely you will be approved for a loan. It’s important to review your debt-to-income ratio before you apply for a loan, as there are steps you can take to help lower it. This includes making extra payments on debt or negotiating lower rates or payments.
Ensuring that your DTI is manageable before applying for a home mortgage can go a long way in the approval process.
4. Employment history
Employment history is another important factor for lenders to consider when evaluating your home mortgage application. This shows lenders if you can hold a job, establish credit, and manage your finances over a period of time.
Generally, you should have held the same job for a minimum of two years to be eligible for a mortgage. However, having job histories that demonstrate stability — even if they’re with different employers — can also favorably influence your application with lenders.
Lenders will also be looking at the type of job you have. Generally, they prefer applicants to be employed in steady jobs with long-term career potential in a professional field, such as healthcare or finance.
If you’ve been employed in a less-traditional job, don’t worry — there are still opportunities for you to get approved for a loan. Just be prepared to provide additional paperwork to your lender, such as a two-year work history.
The final factor affecting mortgage loan eligibility is bankruptcy. Bankruptcy has a huge impact on a loan application. Most lenders require borrowers to wait a certain amount of time following bankruptcy before applying for a home loan.
If you have a recent bankruptcy on your record, it will almost certainly preclude you from a home loan. However, you will be more likely to qualify if the bankruptcy is older. Whether or not you qualify will depend on the lender’s risk appetite and the time that has passed since the bankruptcy.
If you filed for bankruptcy, the lender would look at your payment history in the past two years and any collections accounts or foreclosures that resulted from the bankruptcy. The lender will also consider your emergency fund, credit rating, and employment history prior to the bankruptcy. These factors will help the lender evaluate the risk of approving your loan.
Having a bankruptcy does not necessarily mean that you cannot get approved for a mortgage loan. It is important to be honest and up-front with your lender and provide documentation that makes you a more attractive loan applicant.
Foreclosure is when a lender takes possession of your property since you stopped making mortgage payments. This can seriously impact your ability to qualify for a home mortgage loan.
Most mortgage lenders require borrowers to wait a minimum of three to seven years before applying for a home loan if they had experienced a foreclosure. During this time, it’s important to gradually rebuild your credit score and save for a down payment.
If you can demonstrate to the lender that you’ve maintained a stable income, saved for a down payment, and invested in improving your credit score, you will be more likely to get approved for a loan.
It’s important to be mindful of the fact that some lenders may deny you a loan after a foreclosure. However, there are some lenders who specialize in helping borrowers who have experienced foreclosure in the past. It’s important to shop around and find the right lender to offer you a loan with good terms and a low-interest rate.
7. Mortgage insurance
Another reason your home mortgage might have fallen through is due to a lack of insurance. Mortgage insurance is an insurance policy that protects your lender if you cannot make your mortgage payments. Lenders usually require it if the borrower has a down payment of less than 20% of the loan amount.
Typically, mortgage insurance is paid as a percentage of the loan amount and paid monthly. It can be the key to helping you qualify for the type of mortgage loan you want. Without it, the lender might not feel secure enough to offer you the loan that you need.
The amount of mortgage insurance required will vary based on the type of loan and the down payment amount.
However, getting at least a minimum of mortgage insurance when applying for a loan is usually a good idea. That way, the lender knows they will not be held entirely responsible if you cannot make your mortgage payments.
8. The home inspection
Home inspections are another assessment of the property — this time with the goal of finding any issues or problems that may be at work. If the home inspection reveals repairs are needed, the buyer can ask the seller to complete these before closing on the home.
They also might ask the seller for repair credits, which would give them the cash to make the repairs on their own after move-in.
If the sellers won’t agree to either of these solutions, the buyer can either move forward (and just foot the bill for the repairs on their own) or terminate the house contract and find a different property. Home inspections are the No. 3 reason for recently terminated contracts.
9. The buyer can’t sell their old house
Many homebuyers are also home sellers. When this occurs, it’s common for the buyer to include a sale contingency in their contract — meaning they want to buy the house, but only if they can sell their current property first.
If that current property doesn’t sell, though?
The buyer can back out of the deal unscathed, leaving the seller back at square one. (It’s sort of like a very precarious chain of dominoes. If one contract fails, they all do.)
10. There are problems with the home’s title
Title issues can also make a deal fall through. In some cases, there may be a lien against the property, which means the seller owes a creditor of some sort, and the debt must be cleared before the home can transfer hands. This typically happens if they failed to pay a contractor or repair person or if they have unpaid income or property taxes.
If neither the buyer nor seller is willing to pay these debts off, it could mean terminating the sales contract is necessary.
Another issue that can come up is if the title search reveals another party on the deed — like a former spouse or distant family member. When this is the case, the additional party will need to be willing to sign the title transfer and sell the property.
If they can’t be contacted or are unwilling, it could cause the deal to fall through.
The bottom line on why a mortgage falls through
The mortgage underwriting process plays a crucial role in determining the approval or rejection of a home loan. Factors such as the home appraisal process, credit score, debt-to-income ratio, employment history, bankruptcy, foreclosure, and mortgage insurance all contribute to the lender’s decision.
It’s important for borrowers to be aware of these factors and take the necessary steps to address any issues that may arise, such as improving credit scores, managing debt, maintaining stable employment, and rebuilding after bankruptcy or foreclosure.
By understanding and proactively addressing these factors, borrowers can increase their chances of successfully securing a home loan.