Now that you’ve submitted your mortgage application, received approval, and have less than a week until closing, you’re starting to feel like you can finally exhale. To all appearances, you are in the final stretch of the home-buying process — only for your mortgage to fall through.
While this may sound like the stuff of stress nightmares, the truth is, it happens. Even buyers approved for a mortgage may have their approval withdrawn just a few days before closing, or even once construction of their new home has begun.
Are you breaking into a cold sweat right now? Worry not. Most rescinded mortgage offers can come down to one (or more) of a few common reasons — and if you know what to look out for, these pitfalls will be that much easier to avoid.
Why Are Home Loan Offers Withdrawn?
Mortgage approvals are at risk of last-minute reversals because most lenders not only verify your credit, income, and employment at the beginning of the process; they also typically re-verify those factors within a week of your closing date. In some cases, lenders may even pull your credit report more than twice — for instance, if more than four months have elapsed between the initial credit check and the home sale.
If your finances have stayed about the same or improved since the beginning of the application process, congratulations! You’re likely all set to close. But if you’ve recently become a weaker applicant on paper, you’re in danger of having your mortgage and home purchase fall apart.
Read on for our top six reasons why a mortgage approval might suddenly be reversed.
Top Reasons for Mortgage Reversal
1. Changes to Employment
In the world of home financing, consistency and reliability are just as important as having money in the bank. Your current job and employment history are crucial in this regard. Lenders prefer not only a current steady income, but a consistent two-year history in the same line of work. It’s generally a bad idea to switch fields during the period between your mortgage approval and closing or to change jobs at all (unless, say, you’re accepting a promotion or a more lucrative role within your profession). Aside from these suggestions, avoid changing from a full-time job to a part-time one, switching from a salary to an hourly wage, or engaging in activities that could potentially diminish your income.
2. Debt-to-Income Ratio Increase
You’ve probably heard of the debt-to-income ratio (DTI) if you’ve been considering home financing. Your DTI is determined by dividing the amount of monthly debt repayment (your bills) by your gross monthly income (your paycheck). Lenders prefer applicants with a DTI below 43%, with an ideal DTI falling below 28%. That said, there are loan options for borrowers with a higher DTI.
While lenders would be happy to see your DTI go down during the mortgage process and may even offer you better interest rates as a result, you should try to keep your DTI from going up. If you can, avoid major purchases made on credit — keeping in mind that the definition of “major” could range from a few hundred dollars to hundreds of thousands, depending on the lender’s guidelines and your income.
Also, try to avoid applying for new credit lines during this time, as this will cause a hard inquiry on your credit report and increase your overall debt, whether or not you use the credit line. Applying for other kinds of installment debt, like car loans or personal loans, is also risky for the same reason.
3. Missed Credit Payments
This one’s probably obvious, but a missed credit payment can damage that all-important track record of proven financial reliability. If a lender sees that you’ve previously made payments on time, only to find that you let one (or more) slip after your approval, it can make you seem like less of a safe bet. It’s crucial to remember that payment history makes up a whopping 35% of your credit score, and a single missed payment could lower your score by over 100 points.
4. Increased Spending
Whether or not you’re using your credit line, make sure you aren’t excessively spending in the runup to closing – especially if you’re using cash set aside for closing (and remember that it may appear this way on paper, whether or not you’re dipping into your closing funds). Make sure your future budget is prepared so that your lender won’t raise eyebrows about where your money has gone, and wonder if you can stick to a financial plan. In the event of spending or debt incurred by a personal or medical emergency, your lender may accept a written explanation as a mitigating factor.
5. Inattention to Credit Scores
Anyone who applies for a mortgage needs a rock-solid understanding of their credit score, the factors that went into it, and how they can maintain or even improve it throughout the mortgage approval process. It’s also helpful to be aware of how your credit score varies across bureaus, as your score can vary by 50 points or more from one to the next. Lenders typically request scores from all three major credit bureaus — Experian, TransUnion, and Equifax — and choose whichever score falls in the middle, but these practices aren’t standardized and can vary. Personal finances websites like Credit Karma, or Experian’s free FICO score updates, are great resources for anyone wanting to unpack their credit history.
Regardless of which score your lender uses, you should be able to keep things steady by paying your bills on time — and if you’d like to try raising your score, try to pay down more of your existing debt. This could be well worth the effort: If your credit scores increase during the application process and you haven’t locked in your mortgage rates yet, your lender may offer you a lower interest rate after checking your credit again. That said, not all lenders allow this, so you’ll want to check with yours.
6. Uncertain Work and Residency Authorization
If you’re relying on residency papers to live and work in the US, you’ll need to make sure that your legal status extends well beyond the closing date. In order to cover possible delays and show your stability after closing, you need to keep green cards, employment authorization documents (EADs), and visas valid for at least 12 months following closing. This is particularly important for non-citizens who may not have a long-term US credit history yet to bolster their application.
In the final breakdown, we can all agree that the last thing a homebuyer wants is to have their mortgage withdrawn at the last minute. But it’s important to recognize that if you’ve been offered a home loan in the first place, you’ve already proven yourself to be a capable and reliable applicant. The same qualities that helped you get approved can also get you over the finish line — even if you find out at the end that a bit more strategy is required than you thought. We know you’re tired, but don’t give up! You’re almost there.
At K. Hovnanian Homes, we take pride in our meticulous attention to detail and excellent customer service. You can find our new construction communities across the U.S., each with a range of thoughtful, stunning home designs. Find K. Hovnanian communities in your state.
Learn more about new home financing at K. Hovnanian American Mortgage, LLC.
Last Updated on April 11, 2022