Mortgage loan approvals in today’s environment are pretty much iron-clad. Prior to the entry of electronic loan submissions and automated underwriting, getting loan papers to the settlement agent was at times a bit unsettled. It would take days just to gather enough third party data in order for the loan package to be submitted to the underwriter and during that processing time things could not only change that could create a snag but a big surprise toward the end of a loan approval could mean the loan got denied at the very last minute with little to no time left to make any corrections to get the file back on track.
Today however this last-minute denial really doesn’t happen all that often. When loans are submitted for an automated approval online the lender is provided with a list, line item by line item, of all the things needed to close the loan. It’s rather straightforward and one of the reasons loans rarely fall out. As long as the lender followed the “punch list” everything would move right along toward a final approval. But unfortunately, that’s not always the case.
Loan officers can basically tell you what will be asked for by the automated underwriting system. Experienced loan officers know this by heart. For example, lenders are required to determine affordability of both the mortgage payment along with other credit obligations. That is accomplished by comparing debt with income. To verify income, lenders will ask for the most recent pay check stubs covering a 30 day period. This gross monthly income is the amount used for qualifying.
Loan programs today also require a two year employment history. This verification is accomplished by receiving and reviewing the last two years of W2 forms. The forms will not only show annual income but have the applicant’s name, address and other identifying information listed. For self-employed borrowers who may not receive regular pay check stubs but get paid by others for work performed will provide copies of their last two years of both federal and personal income tax returns to fulfill the two year employment requirement.
Bank statements are needed to verify there are sufficient funds to close to account for the down payment, closing costs and cash reserve requirements. Finally, a credit report is pulled and credit scores delivered to satisfy credit guidelines. Yet even with all this upfront documentation, there will likely be additional items needed to close the loan. A lender can issue a “conditional” approval and go ahead with the loan papers as long as the condition(s) is satisfied prior to closing. For example, an underwriter will ask for most recent pay check stubs covering a 30 day period and while the loan is being processed and papers delivered to the settlement agent, one of the pay checks stubs becomes older than 30 days. All credit, income and employment documents in a loan file must meet this 30 day window. If a pay check stub is say 40 days old, a loan can still be approved based upon the borrowers providing the updated pay check stub at the closing. But unfortunately, there are some things that can derail a loan approval leaving no time left to make any adjustments.
What Causes the Denial?
One common reason a loan gets turned down at the last minute is that the borrower’s employment status has changed since the initial loan application was submitted. To make sure borrowers are employed right up to the very end of the loan process, underwriters can make a quick phone call to the employer asking if that person is there. If not, it indicates the borrower has a new job or is out of work. Either way, this situation can kill a loan approval.
Another reason a loan receives a last minute turn-down is when a credit payment is missed and shows up on a credit report that wasn’t there when the report was first pulled. If the late payment turns out to be one too many the loan could be declined. Or, if a late payment is reported on a more critical item such as a mortgage or rent, the loan could also fall through.
Loan officers tell borrowers to not make any significant changes while the loan is being processed. Change such as a new job. Even if the new job pays more in the event of a new opportunity at another company, it could take some time to get one month’s most recent pay check stubs from the new employer as pay at a new job is usually one to two weeks behind. The old pay check stubs won’t work because the borrower doesn’t work there any longer so the lender must wait for new checks to be generated which takes time.
Someone that makes a new purchase of a relatively larger magnitude such as a new automobile or boat could have new monthly installment payments appear which will drive up debt ratios to the point the new loan is no longer affordable. Even if someone was getting serious about buying a new car and applied for an auto loan but later decided not to, a credit report inquiry will appear on a credit report. The underwriter doesn’t know if a new loan was taken out or not because not enough time has elapsed for the loan company to report the new account. While this situation is typically explained away, it’s a serious issue that has to be addressed.
Higher than expected property taxes and insurance can also turn a loan approval into a denial. When a loan is first submitted to the automated underwriting system, it’s common for the loan officer to estimate what the taxes and insurance would be in order to receive a conditional approval. While most loan officers are pretty good about making these estimates, there may be other issues in the borrower’s past that could keep an insurance premium higher than normal. Someone with multiple claims against a policy, credit scores or other surprises can happen and cause a premium to spike. If the insurance payment is high enough, debt ratios will be negatively affected. So too can underestimated property taxes get a deal turned down.
As we said, a last minute denial is relatively rare. The lending guidelines are straightforward and the approval conditions are listed for the lender to work on. Further, experienced loan officers know in advance if a loan will be preapproved or not and act accordingly. If someone has met with a loan officer and provided the needed documentation, getting a loan to the closing table is pretty much a done deal.
The author, Matt Herbolich, MBA, JD, LLM NMLS #1649154, is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Contact Matt Herbolich, MBA, JD, LLM for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email firstname.lastname@example.org.