Why Would A Loan Fall Through Before Closing?
What are some reasons people – who have shopped for, found, and even had an offer accepted on their dream home – can’t get the loan they were promised?
Reason No. 1: Waiting to line up financing before you start searching for your home.
“Your first step in the home-buying process should be to meet with a mortgage lender or broker to discuss your financing options”, says Carol Olmsted, a loan officer in Sacramento, CA. “You don’t truly know what you can afford until you meet with a lender.”
In other words, it doesn’t matter if you love the kitchen in that million-dollar house if you can’t get a loan to purchase a home that nice. Maybe you can, but wouldn’t it be nice to know just how nice before you waste time?
Reason No. 2: Using a bait-and-switch mortgage lender.
The mortgage industry is rife with scams. Many advertise super-low interest rates, or super-fast approval, or loans with poor credit scores. While not all of them are teasers, many are. You don’t want to find out after you’ve spent time shopping for the perfect home, and getting an offer accepted, that you didn’t qualify for the advertised deal. To make sure your financing is rock-solid from the start, ask your real estate agent for lender recommendations. Then ask that lender for a Pre-Approval letter – NOT a pre-qualified letter. With preapproval, you’ll know upfront which loan you can truly get. No surprises!
Reason No. 3: Getting pre-qualified not pre-approved.
Pre-qualification and pre-approval might sound similar, but they’re not. Essentially, anyone can get pre-qualified for a loan, because it only involves having a conversation with a lender about the state of your finances – no documents are exchanged.
Pre-Approved involves the lender gathering all necessary documentation – your tax returns, bank statements, pay stubs, and more – packaging the loan, and submitting the file to an underwriter for review. If everything checks out, the lender will issue you a written commitment for financing up to a certain loan amount that’s good for up to 90 or even 120 days. And with a locked interest rate!
When you submit an offer on a home, you can include your pre-approval letter and the seller will know you’re ready to buy.
“Educated sellers won’t even entertain an offer unless the buyer has a letter of pre-approval from a reliable lender”, Carol says.
Reason No. 4: Making lowball offers in a seller’s market.
If you’re in a seller’s market, making a crazy lowball offer can piss off the seller and kill any chance of negotiating. You need to rely on your real estate agent to determine whether a house that you’re interested in has a fair listing price.
In a seller’s market, it’s not unusual for offers to come in above the asking price, so trying to low-ball is a bad move. If a home is priced right according to your comparative analysis, it makes sense to offer full price.
Reason No. 5: Making a big purchase after your offer is accepted.
Purchasing a big-ticket item like a car or a boat while you’re buying a house can jeopardize your financing. Why? Because your mortgage lender’s underwriter is going to re-evaluate your finances and recheck your credit report shortly before closing to determine that you’re still able to qualify for the loan. Also, we should note that changing jobs can have a negative impact as well.
“Even buying a fridge can throw off your credit score or debt-to-income ratio,” says Carol. “Don’t make any big purchases until after you close on the house. And please, don’t get fired or quit…”
Reason No. 6: Not budgeting for closing costs.
If you don’t have enough cash to cover closing costs, you won’t make it to settlement. And if that’s the case, you could lose your earnest money deposit. But if you followed reasons 1, 2, and 3 above, then you already got an estimate from your mortgage lender of what your closing costs will be before you made an offer on the property (currently, this information is legally required to be given to you—just make sure you read it).
Closing costs vary widely by location, but they typically total between 2% and 3% of the home’s purchase price. On a $250,000 home, your closing costs could be $5,000 to $7,500. Both buyers and sellers usually pitch in on closing costs, but you need to make sure you have enough cash on hand, or have included it in the loan, to pay your portion.
Buying a home is big deal, but it doesn’t need to be a big hassle. We’ve secured loans for every kind of buyer and under every kind of circumstance.