Home loans can be a bit complicated and if things go wrong, it's usually due to trouble with finances. Other times, your loan could fail because of problems with your loan documentation.
Our rock star head of Processing, Jenny Lowe, helped us understand some of the most common documentation problems that can lead to denial.
Before we get started, know that many of these situations don’t have to be deal breakers—your dreams of homeownership may still be within reach! Just plan for a little extra work if any of the following apply to you.
Once you’ve made a deal with a home seller on a purchase price and both parties have signed the REPC (real estate purchase contract), an appraiser will come in to verify the market value of the home. This objective real estate professional will review the property and look at similar home sales nearby.
If the appraised price comes back higher than the agreed price, you’re in luck! You’re likely getting a good deal on the property, and the appraisal document probably won’t cause any trouble. If the appraisal comes back lower than your agreed priced, there’s a good chance your loan won’t go through. This protects your lender—they don’t want to lend more for a home than it’s worth. It also protects you from spending more than market value on a home.
If this happens to you, it may be possible to go back to the negotiating table with the seller to get a lower price. You could also make sure there aren’t any errors on the appraisal that would have caused the difference. In some cases, you could even wait until a comparable home sells at a lower price or request that the seller make up the difference in cash.
If you've had a divorce, your lender may need some paperwork to prove that all the financials are in order. Your divorce decree needs to be signed by a judge and executed by a court, and your lender will need a copy.
Things get even more complicated if you owned a home with your spouse and are still on the mortgage, even if you have quit-claim the deed. You might be able to prove that you aren’t responsible for the debt by providing 12 canceled checks that show payment from the bank account of your former spouse (but not from a joint account), or you could encourage your ex to refinance to a new loan.
Child and spousal support
On the topic of family responsibilities, your lender may also need to see docs related to child support or spousal support (alimony) payments. Requirements differ depending on your loan type, but if you owe, your lender needs to know. If you’re receiving either kind of payment AND will continue to do so for at least three years, you may be able to use these funds as a source of income.
Your Loan Officer won’t pry into your personal life any more than necessary, but be open and honest about your situation and they will help you get the answers you need.
Lots of people run into problems with money, but it doesn’t mean they can never achieve the benefits of homeownership.
If you’ve filed for bankruptcy in the past, waiting periods may apply and you may need to explain what happened to your lender (and give reasons why it won’t happen again). There’s also a good chance that you’ll need to provide discharge papers showing you are no longer responsible for the debts in question. Your Loan Officer can get you all the details.
People are changing jobs a lot more now than they did a few decades ago, but having a new job can complicate things when it comes to loan documentation. Your lender will definitely give your current employer a call to ensure that you have stable income, and they might call past employers for up to two years as well.
If you own your own business or have been freelancing or consulting, your lender will ask for docs such as your business license and client contracts. The best way to be prepared is to keep track of all your tax info going back at least two years.
When lenders consider sending you money for a house, it’s pretty important to check that you have as much money as you say you do. They’ll check your bank and retirement accounts and may ask for an explanation of large cash deposits to ensure that you haven’t taken out another loan. For deposits that haven’t been in your account for at least 60 days, expect to provide a gift letter or letter of explanation about where the money came from.
New credit accounts and DTI
Just like lenders need to know how much you have, they need to know how much you owe. The target DTI (debt-to-income ratio) for most home loans is about 43%.
Problems often come when you take out a new loan or open a new credit line while you’re in the process of qualifying for a mortgage. Terms such as your loan amount and rate are determined using your DTI (among many other factors) and a change late in the game could result in denial.
To stay on the safe side, don’t open any credit accounts or make big purchases while you’re in the process of buying a home, and don’t agree to let anyone (other than competing mortgage lenders) run your credit.
If you are receiving income from a pension, your lender will need to see proof. They’ll ask for paperwork that shows the income will continue for at least three years (a document known as a continuance). If you have questions about exactly what you’ll need to show your lender, talk to your Loan Officer early on in the process.
Liens that come up during a title search
A lien is a record attached to a piece of property that means funds from the sale of that property will go to the holder of the lien. You can think of it as a legal claim for a debt that is secured by the property itself. Title companies keep track of these liens on properties—that’s why these companies are an essential part of every real estate sale.
One of the most common liens placed against houses are for unpaid taxes, meaning the municipality or tax district has sued for the right to be paid from proceeds of a sale. A home could also have a lien from other types of debts, such as unpaid credit cards or fees owed to contractors.
Sometimes, a home loan can fail because the seller failed to disclose liens on their property. The lender will find these when they do a title search on the property, so it’s in the seller’s best interest to either pay off or disclose everything upfront.
The bottom line
If your loan application is denied, don’t lose hope. It happens in about 15% of applications, and it won’t hurt your credit.
When this happens, your lender is required by law to send a declination letter listing the reason (or reasons) for the denial. If the decision was related to your credit, this letter should tell you how to get a free copy of your credit report. Combined, your declination and credit report can give you a roadmap for qualifying in the future.
It may also help to shop around. Every loan type has its own criteria, and that means different documentation is needed. Beyond that, one lender may have different criteria than another on the same loan type due to different standards (known as loan overlays) from their investors.
You deserve to work with a Loan Officer you can trust and who makes time for all your questions. When you’re ready to build your home loan team, a Castle & Cooke Mortgage Loan Officer in your area can help you get started.