Rejection hurts. And itâs even more upsetting when it gets in the way of buying your dream home.
Once you get your offer accepted, it may feel like thereâs nothing thatâll stop you. But, unless youâre a cash buyer thereâs one last hurdle youâll need to go through before everythingâs final. The mortgage underwriting process is what real estate agents use to decide whether to approve or deny your loan application and your chances of purchasing the house of your dreams.
It’s critical to comprehend the underwriting process, the main causes of mortgage loan denials, and some advice for avoiding loan denials.
Congratulations! You’ve found your dream home and your offer has been accepted. Now comes the next crucial step: mortgage underwriting. This procedure may seem mysterious to you, and you may become fearful of possible dangers. Don’t worry; we’re here to explain any potential obstacles you may run into and provide you with the information you need to overcome them.
What Happens During Underwriting?
Think of underwriting as a thorough financial checkup. Your lender meticulously examines your financial health and the property you’re buying to determine your creditworthiness and the risk involved in lending you money. They’ll scrutinize your income, assets, debts, credit history, and the property’s appraisal to assess your ability to repay the loan.
Common Culprits of Mortgage Denial:
Several factors can derail your loan approval during underwriting. Let’s delve into the most common culprits:
1 Credit Report Hiccups:
Your credit report serves as a financial report card, detailing your credit accounts, payment history, and outstanding debt. Any blemishes on this report can raise red flags for underwriters. Missed payments, maxed-out credit cards, or recent inquiries for new credit can all negatively impact your score and potentially lead to denial.
How to Avoid:
- Monitor your credit report regularly: Check for errors and dispute any inaccuracies promptly.
- Maintain responsible credit usage: Keep your credit utilization low and avoid maxing out your cards.
- Refrain from applying for new credit during the underwriting process: This can negatively impact your score and raise concerns about your financial stability.
2. Job Jitters:
Because underwriters prefer consistency, frequent job changes may cause them to question your ability to make ends meet. This is particularly true if you’re switching to self-employment, as it can be harder to demonstrate a steady source of income.
How to Avoid:
- Maintain stable employment: If possible, avoid job changes during the underwriting process.
- Document your income thoroughly: If you’re self-employed, provide detailed tax returns for the past two years to demonstrate consistent income.
3. Debt Overload:
Lenders assess your debt-to-income ratio (DTI) to gauge how much of your income goes towards debt payments each month. A high DTI indicates a greater risk of defaulting on your mortgage, potentially leading to denial.
How to Avoid:
- Reduce existing debt: Pay down outstanding debts before applying for a mortgage to lower your DTI.
- Increase your income: Explore ways to boost your income, such as taking on a side hustle or negotiating a raise.
- Consider a co-signer: If your DTI remains high, a co-signer with a strong credit history can help improve your chances of approval.
4. Down Payment Deficiency:
Most lenders require a down payment to mitigate their risk. The down payment affects your loan-to-value ratio (LTV), which compares your mortgage amount to the property’s appraised value. A low down payment results in a higher LTV, which can lead to denial for certain loan types.
How to Avoid:
- Save diligently for a larger down payment: Aim for at least the minimum down payment required for your chosen loan type.
- Explore down payment assistance programs: Several government and community programs offer assistance to first-time homebuyers.
- Consider a less expensive property: If a larger down payment is not feasible, look for a home within your budget that requires a lower down payment.
5. Property Imperfections:
The property you’re buying also undergoes scrutiny during underwriting. If the appraisal comes in lower than the purchase price or reveals significant issues, your loan approval could be jeopardized.
How to Avoid:
- Get a pre-purchase inspection: This can uncover potential issues before you finalize the purchase.
- Negotiate with the seller: If the appraisal comes in low, try to renegotiate the purchase price or request repairs from the seller.
- Consider a different property: If the issues are too severe or cannot be resolved, you might need to consider a different home.
Remember, knowledge is power. By understanding the potential pitfalls and taking proactive steps, you can significantly increase your chances of a smooth underwriting process and secure your dream home.
Additional Tips for a Successful Underwriting:
- Be transparent and upfront: Provide all requested documentation promptly and answer questions honestly.
- Maintain financial discipline: Avoid making large purchases or taking on new debt during the underwriting process.
- Communicate with your lender: Keep your lender informed of any changes in your financial situation.
- Seek professional guidance: A mortgage broker or financial advisor can provide valuable insights and assistance throughout the process.
While the underwriting process can seem daunting, understanding the potential challenges and taking proactive measures can help you navigate it successfully. By maintaining a strong credit history, managing your debt wisely, and providing accurate information, you can increase your chances of securing your dream home and embarking on a fulfilling homeownership journey.
Your Employment Status Recently Changed
Lenders like to see financial stability. If you canât prove your income is steady, lenders will worry if you can afford a mortgage. If you’re looking for work and submitting a mortgage application, just make sure you’re upfront with your lender. Most mortgage lenders require at least 2 years of previous income for verification of employment (VOE).
You Have A History Of Missed Mortgage Payments
Your underwriter might decide it’s not worth the risk to approve your loan for this new home if they have proof that you have consistently and on time paid your mortgage in the past.
For a certain amount of time, you might not be approved if you have a foreclosure or short sale on your record.
2 Big Reasons Home Loans Blow Up In Underwriting – [Underwriting Mortgage Process]
What should you not do during the underwriting process?
To help improve your chances of getting a loan, don’t take out any new credit, change jobs, or miss any bill payments during the underwriting process. About 9% of mortgage applications to buy a home in the U.S. were denied in 2020, according to the Consumer Financial Protection Bureau. What Happens in Underwriting?
What if my underwriter finds a problem in my mortgage application?
There are a few ways you can immediately rectify the issues an underwriter finds in your mortgage application. If the fixes were quick – if you were missing some information, for example – your mortgage underwriter would likely have granted conditional approval.
Why do underwriters deny loans?
It’s the job of people called underwriters to decide whether you can be trusted to pay back such a large sum of money. Let’s take a look at some of the most common reasons underwriters deny loans. A home appraisal is a key part of the process, wether you’re buying a home or refinancing.
What can cause a 401k underwriting problem?
Start here (May 17th, 2023) Some of the areas that pop up during the underwriting process that can cause problems, he says, include: Assets – A customer might not disclose everything they have such as all of their 401K accounts or their two different bank accounts. “They aren’t using all of those assets for qualifications,” Wells says.