Getting a Mortgage Approved (and Keeping It That Way!)
Anyone with experience buying or refinancing a home can tell you the kind of relief that washes over them when they find out their mortgage application is approved. There's so much build-up to that moment, with all the document gathering, credit reports, income verification, etc.
It’s like sitting on a plane at the gate when the ground crews start the pushback. People feel better when they know their home buying journey is truly underway.
Getting a mortgage is akin to air travel in one more way: even after taxiing toward the runway, takeoffs can get called off. Did you know the status of a mortgage approval can change? This article clarifies aspects of the mortgage application and ensuing home buying activities that you, your lender, and real estate agent can control as well as things outside your control like market conditions, or unforeseen issues like a failed home inspection or low appraisal.
Not only will you see how to get approved for a mortgage -- but equally important -- how to stay approved by avoiding conditions that can cause a delay or unwelcome denial.
Your loan application, and accompanying documents, helps you and your mortgage advisor determine how much you can afford and which type of mortgage program is the best fit.
Delays Getting Documents Together
It takes a little time and effort to round up pre-approval documents. But, getting them is much easier than it used to be. In the ever-increasing digital world, storing hard copies of your bank statements and pay stubs is increasingly unneeded. Today, you’re more likely to log into your bank or payroll website to download the documents (PDFs) you need.
However, some employers – even in the information age – still do not use online payroll services. If that is the case for you, keep W2s and recent pay stubs within reach.
All prospective home buyers will need to provide the same core documents. They are:
- Official identification like a driver’s license, passport, or state-issued ID
- 60 days of bank statements, all pages
- 30 days of pay stubs
- 2 years tax returns – and if self-employed, have rental properties or non-salary income, use 1099s
- 2 years W2s
In many cases, underwriters may also ask for additional items like:
- Retirement income, such as social security, pensions or award letters
- Other earnings sources (e.g. alimony or disability payments)
- Rental agreements for any investment properties currently owned
- Down payment gift letter (if applicable)
Before you apply for a loan, check to make sure your identification is valid. An expired driver’s license won’t work. If yours is expired, you’ll be better off getting a renewal before you start the mortgage loan process.
KEY TAKEAWAY: Keep Original Documents Nearby. If you’re moving, don’t accidentally pack any original documents in boxes that’ll be stored in hard-to-get-to places (e.g. storage units). If you’re getting financial assistance for your down payment, keeping an original, signed mortgage gift letter close by is advised. Same goes for divorce decrees.
Failure to Disclose Financial Information
Underwriters (the people who approve or deny a home loan) will verify all sources of income and liabilities (debts).
Cash shouldn't magically show up in your bank account. All funds must be traceable and seasoned (in your bank account for at least 60) days. Also, be sure to deposit earnest money from your bank account – funds must be tracked for an underwriter to perform a verification.
If you receive down payment gift funds, they'll need to be documented using a mortgage gift letter. Both the donor and recipient (you) must sign it.
Failure to disclose debts, tax liens, etc. can also jeopardize the deal.
Report any income from a second or part-time job (even if you're running a side business from your garage). Conversely, part-time work resulting in losses must also be disclosed. Say your teaching salary is $50,000 annually, but your summertime lawn mowing business shows a loss of $5,000. Both the gains and losses must be taken into account.
The Wrong Sequence
Shopping for a home is fun. Let’s face it, it's far more enjoyable to look at pictures of homes for sale, and imagine yourself living in your dream home, than thinking about financing it. Online house hunting often draws would-be buyers into falling in love with a property before they've been pre-approved for a loan. That can backfire for a couple of reasons.
First, you may pick a home you can't afford. Second, your credit score might need to improve a little before you’ll qualify (something that can typically improve in a few months). There's a "right" order of events that make for a much smoother home buying experience. First comes the pre-approval. Then comes the shopping.
Changes to a Borrower's Credit or Finances
During the period leading up to mortgage pre-approval, many prospective borrowers put effort into sprucing up their credit score. They may pay down outstanding balances or pay off some debts entirely.
However, once you’ve been pre-approved, and are actively shopping for a home in the market, it’s time to go into a “quiet period” of sorts. Now is the time to keep steady in your monthly debt payments and don't take on any new debts or credit cards, even if you don't intend to use them. Furthermore, don't start making extra debt payments (even if you think it will help – it won't).
Keep this in mind: your credit score may be checked again, at any time, even the day before your loan closing. You do not want to jeopardize the transaction by engaging in negative financial behaviors. Here are a few to avoid:
No New Bank Accounts
Opening new bank accounts can send a mortgage approval sideways or even grind the gears of the application to a halt. As mentioned above, this is the time to keep a steady hand.
No Big Bank Deposits
Be careful with large bank deposits or transferring big chunks of money between existing accounts, especially in cash. All money in your bank accounts must be traceable and have a history of being in those accounts at least 60 days, also known as, “Sourced and seasoned funds.”
No Big Purchases
Here’s another bad idea: making big purchases like a new car or furniture. Now is not the time to change your monthly debt obligations whether it’s a lease, loan or results in a higher credit card balance. Any new debts will alter your debt-to-income ratio (DTI) and can change how much you can afford (your approved loan amount) for the worse.
Even if you pay for a big purchase with cash instead of credit, a reduction in of cash-on-hand in your bank account (also known as “reserves”) can also have a negative impact.
Don’t Increase Credit Card Balances
While big purchases are a bad idea, a series of smaller transactions, which incrementally add to your total credit card debt, can have the same, undesired effect. Don’t let a bunch of small transactions sneak up on you.
No New Credit Cards
Every time someone applies for a credit card, it increases their total spending limit, generating a higher potential debt load. Underwriters won’t like how that looks. Just the potential for you to go out and spend more money triggers concerns. Plus, new credit inquiries can ding one’s FICO score by a few points.
No Late Payments
Make sure to keep paying all your bills on time and in full. I think this is the third time mentioning this (but who's counting?): maintain a steady state of your financial affairs.
When a Borrower's Situation Changes
When assessing the military theater of operations, a commander might say, “Conditions on the ground have changed.” Thus, strategic and tactical plans are modified to accommodate the new situation.
The same goes for a borrower’s loan approval status should his or her employment or financial picture change. For a borrower who plans far in advance -- getting a mortgage pre-approval months before making an offer on a home -- a borrower’s situation can change in the intervening period. Things like:
Be sure to tell your loan advisor if you get a raise, salary cut, promotion, demotion, job transfer or change in your compensation structure (e.g. salary and commission). Any one of those factors can either help or hinder your ability to purchase or refinance a home.
This one is pretty self-explanatory. Removing a co-borrower's income from a loan application will change the approved loan amount. And, it could change the remaining borrower's debt-to-income ratio (DTI) should the borrower become responsible for alimony payments (adding another debt obligation).
Of course, the borrower could become the recipient of alimony, which would improve their DTI.
Stuck in Underwriting
Perhaps your local real estate market is “hot," and a bidding war breaks out, and other interested buyers beat your offer(s). Say you get pre-approved, but it takes a few months of looking before you find a suitable property. Low housing inventory can create additional challenges to find a home you really like. This will obviously add to your overall timeline.
Loan Terms Change
Here are a couple more market conditions on which to keep an eye. While you’re shopping, interest rates may go up, putting downward pressure on the loan amount for which you previously qualified. Mortgage insurance premiums, which don’t change very often, go up and down, too.
Lender Asks for Additional Documentation
Underwriters may ask you to provide more documents while your loan file moves through the underwriting stage. For example, if you recently moved to take a new job, but took a month off between gigs, an underwriter may want to know more about the gap in your employment status. This is typically cleared up with a letter of explanation.
Seller Rejects Deal
Maybe everything runs smoothly during the pre-approval stage, but the offer(s) made by you and your real estate agent aren't resonating with the seller(s). Sellers may reject offers based on your offer price alone. But sellers may also reject any proposed concessions, like covering closing costs for a first-time home buyer.
Appraisal Comes in Low (or Slow)
A buyer and seller can agree on the price of a home, but lenders will require a third-party (independent) appraisal to confirm its market value.
Sometimes, an appraisal comes in low. If this is the case, you may need to put up more cash for the down payment to cover the difference. For example, if a buyer and seller agree on a sales price of $400,000 but the property appraises for $390,000, the buyer will need to come up with $10,000 to make up the difference. Unless the cash is readily available, borrowers may need a few months to accrue and save those extra funds.
Appraisals can sometimes be slow, too. When real estate markets are hot, the volume of appraisal requests spike, but that doesn’t mean more appraisers pop on the scene to do the work. Your expected closing date could be pushed out a couple of days while you wait.
Unable to Insure Home
Homes within areas prone to frequent flooding, fires or other hazards might not qualify for homeowners’ insurance. Generally, it’s easy to know far in advance whether a property can get insured because homes change hands often enough that local records will show potential hazards. However, if you’re buying a home from people who’ve lived in it for 50 years, you won’t have recent transaction history upon which to rely. Denial of insurance coverage is fairly uncommon, but worth noting.
Underwriters will order a title report for the property you want to buy. Negative items that show up, like liens, judgments, and easements can cause a loan denial. Why? Houses are the physical assets that make the paper that the mortgage is printed on actually worth something. Lenders cannot loan money against an asset where the legal rights to it are encumbered or impaired. Titles must be clean.
FHA and VA loans, in particular, are subject to inspections before final loan approval. Issues like pest infestations or homes that are in disrepair can cause closing delays until those conditions are fixed.
Not Keeping Up
There are many parties involved in a real estate deal, from buyers, agents, lenders, escrow and title companies. Anyone unprepared or not keeping pace can cause a delay. In fast moving markets, the odd of a delay is compounded.
Final Walk Through
If flaws with the home come up during the home inspection, necessary repairs are typically listed in the buyer/seller contingency agreement. If the seller is slow to complete those repairs, the loan closing date gest pushed out until they are finished.
Closing Document Errors
Any errors made on the closing documents requires correction. Then, a new closing disclosure must be drawn up, and the three-day waiting period starts over. Also, if there are any big disparities (e.g. fee estimates were way off) between the initial Loan Estimate to Closing Disclosure, an updated disclosure is required along with an accompanying three-day reset.
Buyer/Seller Backs Out
Humans are human; they change their mind.
Buyers have a legal protection to back out of a mortgage before closing, called a right of rescission. Rescission periods are typically three days, creating some “breathing room" before closing in which a borrower may change their mind.
Sellers can back out, too. Though, it’s tougher since they do not have the same legal right of rescission that buyers have. Sellers would be well-advised to include provisions in their contract providing an "out" if they have any concerns. Typical provisions might include time to find a replacement home or deal cancellation if their job transfer doesn't happen.