What To Do If Your Mortgage Loan Is Not Funded After Closing

The process of getting a mortgage approved can be a long, stressful one. There are lots of requirements involved in the course of the application, so getting through to closing is a big deal. However, there are scenarios where the loan application was denied at closing.

As an applicant who has gone through all the necessary processes, including closing, you may want to find out: can your loan be denied after closing?

Getting the keys to your new home is an exciting milestone after months of searching for the perfect property. But for some homebuyers the process hits a devastating snag when the mortgage lender does not provide the funding to close on the home after the closing date. This rare outcome can leave you scrambling to figure out what went wrong and how to get the deal back on track.

A mortgage loan not funded after closing may come as a shock but it does happen occasionally. With some knowledge of the common causes and solutions you can work to resolve the issue or find alternative options to buy your dream home.

Why Loans Are Not Funded After Closing

Closing on a home mortgage involves signing the final loan documents and transferring funds to complete the purchase. In most cases, the funding from the lender is wired a day or two ahead of the closing date. But sometimes lenders discover issues during the final underwriting checks that cause them to withhold the money:

Job loss or change: Lenders verify employment shortly before funding the loan. If you lost your job or changed employers, they may no longer approve the mortgage.
Higher debt: Taking on new debt increases your debt-to-income ratio. If your DTI exceeds lender limits, they could decide not to fund the loan.
Credit problems: Lenders check your credit right before funding. New late payments or collections could make your credit profile too risky for approval.
Appraisal problems: If the appraisal comes back low, it affects the loan-to-value ratio. The lender may not want to fund a loan with a high LTV.
Not enough cash: You’ll need cash for the down payment and closing costs. Without enough funds, the lender may back out of funding your loan.
Loan program issues: You may no longer qualify for the mortgage program you initially applied for. Not meeting FHA, VA, or USDA guidelines could lead to a funding denial.

While unpleasant, understanding why your mortgage was not funded can help you get answers and find solutions.

Frequency of Mortgage Funding Denials

It’s difficult to pin down exactly how often lenders fail to fund loans after closing. The majority of approved borrowers proceed to a successful closing and funding. One source estimates only around 2-3% of approved mortgages fall through before funding.

However, it’s important to note that the likelihood depends heavily on the individual situation. Borrowers with riskier credit profiles or who experience job loss may face higher chances of a post-closing denial. Maintaining your financial status between approval and funding date lowers the odds of issues.

Can You Close Without Funding?

In most real estate transactions, the funding must be available before the official closing can take place. However, some states follow “dry closing” rules that allow the closing paperwork to be finalized before the loan is funded.

In dry closing states, the funding can come days after closing while issues are resolved. This gives more flexibility if problems arise with credit or employment verification. But it also means you don’t truly own the home until the money transfers.

If your loan is not funded after a dry closing, you may have more options to salvage the deal or switch lenders. Talk to your real estate agent or attorney to understand your rights based on state laws.

Getting the Mortgage Funding Resolved

The first step is contacting your mortgage lender or loan officer immediately to determine why the funding is delayed or denied. They should explain what underwriting requirement or qualification was no longer met.

Below are some potential solutions that could help you move forward with purchasing the home:

Update employment status: If you recently changed jobs, provide updated proof of employment and income to see if you still qualify.
Improve credit score: A short-term score drop could resolve on its own. Ask the lender to rerun your credit closer to funding date.
Explain new debts: If you took on new installment loans or credit cards, explain the purpose and necessity of the debts.
Appeal appraisal: Work with your real estate agent on an appeal if the appraisal seems erroneously low. Provide additional comps to show property value.
Prove funds available: Show account statements that demonstrate you have enough funds to cover down payment and closing costs.
Change loan programs: See if you qualify for a different loan program like FHA or VA loans, which offer more flexibility.
Request exception: If issues are minor, ask the lender nicely if an exception can be granted to fund the mortgage. Express how much buying the home means to you.
Add co-borrower: Adding a co-borrower with better credit or income may improve your chances of approval.
Find alternative funding: If possible, tap other sources like gifts from family, grants, or community lenders that may fund the mortgage.
Switch lenders: Check if another lender might be able to fund your loan more quickly or with different requirements.

Persistence and creativity in pursuing solutions can get your loan funding back on track. But it’s also wise to temper expectations in case the mortgage simply cannot be salvaged.

Options If the Mortgage Falls Through

As heartbreaking as it would be to lose out on your dream home, all hope is not lost if the mortgage funding doesn’t come through. Here are some alternative options to consider:

Rent instead: Turning the situation into a learning experience, rent for a year and improve your financial profile for an easier approval next time. Ask the seller if they’d consider a rent-to-own arrangement.

Buy a cheaper property: Look at more affordable homes that better match your current financial standing and down payment savings.

Secure gift funds: Asking family or your community for help with the down payment could tip the scales for approval.

Explore alternative lenders: Online lenders, credit unions, or community banks may offer better mortgage rates and terms.

Get pre-approved again: Talk to several lenders to find one more amenable to your financial situation. Make sure you have a solid pre-approval before making another offer.

Lease with option to buy: This allows you to rent the home short-term while saving up and improving your credit to buy within 1-2 years.

Buy as investment property: If the home has good rental potential, consider purchasing as an investment property with a higher down payment.

Partner on purchase: Team up with a spouse, partner, or family member whose income can help qualify and fund the mortgage.

Wait and save: Give yourself a few more months to boost your down payment, pay down debts, and increase savings.

While a mortgage loan not funded after closing can be demoralizing, all is not lost. In many cases, the deal can be salvaged by addressing the lender’s concerns. But even if that’s not possible, alternative options exist on your path to homeownership. Don’t lose hope!

Avoiding a Post-Closing Funding Denial

To help avoid the nightmare scenario of your mortgage not funding after closing, make sure to:

Maintain your job/income: Don’t change employers or take unpaid leave leading up to your closing date.
Keep good credit habits: Pay all bills on time and avoid new credit inquiries to maintain your credit score.
Minimize new debts: Hold off on large purchases that require loans until after closing.
Communicate changes: If your situation changes, immediately notify your loan officer.
Save closing funds: Have your down payment, closing costs, and reserves gathered in your account prior to closing.
Stay compliant: Make sure you still meet all approval conditions and provide updated paperwork as needed.
Ask questions: If anything concerns you about your approval or ability to close, get answers from your lender right away.

While you can’t fully prevent a post-closing denial, avoiding major financial changes reduces the possibility. Stay in close contact with your lender leading up to your closing date.

Don’t Lose Hope!

As stressful as a mortgage loan not funded after closing may be, all is not lost! Now you understand the common reasons this can happen and have several strategies to pursue a resolution. Even if you can’t salvage the original purchase, alternative options exist to still achieve your homeownership dreams. Stay determined and flexible—with smart planning, you can overcome this hurdle on the road to your future home.

What Could Cause Your Loan To Be Denied?

Mortgages are large loans; this explains why lenders have a long list of requirements for applicants to fill. If you do not meet all the requirements, your application can be denied.

Here are several reasons a mortgage application might fall through:

Low Credit Score: The minimum credit score needed to secure a mortgage is dependent on the lender you choose and the type of mortgage you’re looking for. A USDA loan requires a minimum credit score of 640, while a conventional mortgage or VA loan uses 620 as the benchmark. You can get an FHA loan with a credit score as low as 500, but you will have to make a bigger down payment as against if you had a higher credit score.
No Credit History: If you don’t use credit cards or have never taken out a loan, you may have what’s called a “thin” credit file. This means you have a very minimal credit history — or none at all. Without a credit history, lenders will not be able to approve you for a mortgage unless they are willing to find other ways you can prove financial responsibility.
High Debt-to-Income (DTI) Ratio: Your ability to repay loans will be assessed. Lenders will review the percentage of your monthly income that goes to monthly debts. It may be more difficult to secure a loan if your housing payment is 28% or more of your gross monthly income (31% or more if you’re applying for an FHA loan).
Little Down Payment: By dropping a little down payment, the lenders will read that as you being more unlikely to repay the mortgage. The bigger the down payment you can make; the better chance you have of being approved for a mortgage.
Incomplete Application Information: You may be surprised but even with good credit and a solid income, your mortgage application may be denied if the necessary information is omitted. It is very important to check through your application thoroughly to ensure they are in order before submitting them.
Recent Job Changes: Whatever you do, ensure your job or finances reflect stability. This is one of the attributes that mortgage lenders are on the lookout for; recent job changes may indicate instability in employment. Having the same job for at least two years may help your chances of approval.

Can your Loan Be Denied After Closing?

No, your loan cannot be denied after closing. You have signed all the papers necessary and have reached an agreement. Your lender is bound by law to stick to your contract. After closing, your lender cannot go back on the arrangement they have made with you.

Your loan can be denied anytime from the point of application to the point of closing. However; at closing’ and ‘after closing’ differ in that at closing, the final documents are yet to be signed.

Therefore, cancellation is still possible if the lender finds that you no longer meet some requirements for the loan. That being said, after closing your lender cannot go back on the agreement anymore.

loan not funded after closing

“Can a loan be denied AFTER closing day?”

FAQ

Can a lender not fund a loan after closing?

‘After closing’ is the point where the lender has done the final checks of your application, the papers have been signed, and there’s no reneging on the deal at this point. This is the point where your loan can not be denied anymore.

Can a lender cancel a loan after closing?

In general, a lender cannot cancel a loan after closing unless there are specific circumstances outlined in the loan agreement or if fraud or misrepresentation is discovered. Once the loan has been closed and funded, the lender has typically committed the funds and established the mortgage lien on the property.

How long does it take for a loan to fund after closing?

Mortgage Funding and Refinances If the transaction involves an owner-occupied home, closing and funding won’t happen on the same day. Instead, there is a mandatory three-day waiting period between closing and funding (excluding Sundays and Federal holidays).

Can a loan be denied after closing?

Clear-to-close buyers aren’t usually denied after their loan is approved and they’ve signed the Closing Disclosure. But there are circumstances when a lender may decline an applicant at this stage. These rejections are usually caused by drastic changes to your financial situation.

Is a funded mortgage loan the same as a closing date?

A funded mortgage loan is good news. It means you’ll be able to legally own your property and move in. But the day of funding can vary, and it may not be the same as the closing date. It’s helpful to understand this difference. Related: What happens when I’m “clear to close?” The loan funding process can differ, depending on your state.

What happens if you don’t get a loan on closing day?

The lender should provide a “cash to close” dollar figure once you submit your mortgage application. But if you don’t have enough funds on closing day, you might not get the loan. Sometimes this happens because the buyer expects a certain profit from their home sale but it falls through. How often does an underwriter deny a loan?

What if I don’t get a mortgage on closing day?

Borrowers typically need enough money to cover the down payment, closing costs and a few months’ worth of cash reserves. The lender should provide a “cash to close” dollar figure once you submit your mortgage application. But if you don’t have enough funds on closing day, you might not get the loan.

What is the difference between closing and funding?

Closing occurs when all parties sign loan documents at the title company. Funding occurs when the title company confirms receipt of the lender’s funds. See closing day overview for an expectation of what to expect prior to funding. Please contact the Mortgage Mark Team with any questions about closing and funding.