When Things Go Wrong During Mortgage Process
This BLOG On Solutions To When Things Go Wrong During Mortgage Process Was PUBLISHED On July 9th, 2019
The mortgage process can be a very stressful process. This holds especially for borrowers with credit issues and/or higher debt to income ratios.
- Every mortgage loan application is different than one another
- Some mortgage files can be tricky
- The pre-approval stage of the mortgage loan application process is the most important phase
- When things go wrong during mortgage process is because the borrower was not properly qualified in the pre-approval process
- FHA Loans are the most popular mortgage loans today
- FHA has extremely loose guidelines when it comes to lending guidelines for borrowers with the following:
- open outstanding unpaid collection accounts
- borrowers with prior bad credit
- borrowers with a prior bankruptcy
- borrowers with prior foreclosures
- borrowers with prior short sales
- borrowers with a prior deed in lieu of foreclosures
- borrowers with tax liens, borrowers with a charge off accounts
- borrowers with judgments and tax liens
- Minimum HUD credit score Requirements to qualify for a 3.5% down payment FHA Loan is 580 FICO
- However, just because you meet the minimum credit scores and debt to income ratio requirements does not mean that your FHA Loan approval is a slam dunk
We will discuss examples of when things go wrong during mortgage process on this article and ways of avoiding things from going wrong during the mortgage loan process.
When Things Go Wrong During Mortgage Process: High Debt To Income Ratio Borrowers
One of the main reasons for a last minute loan denial by lenders is because the borrower exceeds the maximum debt to income ratio limits.
- Maximum debt to income ratio caps on conventional loans is capped at 50% DTI
- The maximum debt to income ratio caps on FHA Loans is 56.9% DTI on borrowers with credit scores of 620 credit scores or higher
- Borrowers with credit scores of under 620 FICO, the maximum debt to income ratio caps is at 43% DTI to get an approve/eligible per automated underwriting system (AUS)
- Home buyers who barely meet the debt to income ratio caps when they are issued a pre-approval letter run into a risk of a mortgage loan denial if they exceed the DTI cap during the mortgage process
For example, if a home buyer gets a homeowners insurance quote when he first qualifies for a mortgage loan with high debt to income ratios and if the homeowners’ insurance premiums are higher than originally quoted, they may surpass the DTI cap where they no longer qualify for a mortgage loan.
Debt To Income Ratio Issues
If the borrowers have high debt to income ratios, the loan originator needs to make sure that all of their credit cards are paid down prior to submitting the mortgage loan.
- If the borrower exceeds the debt to income ratio limits during the mortgage approval process due to higher than expected costs such as the following:
- higher than expected homeowners insurance
- or needing flood insurance
- needs to pay off credit cards
- the credit cards will not only have to be paid off but the credit card accounts need to be closed and reflected on the borrower’s credit report prior to loan submission
When Things Go Wrong During Mortgage Process: Foreclosures
Another common reason for last minute mortgage loan denials is due to the mortgage loan originator not researching the mandatory waiting period after foreclosure.
- Loan officers need to make sure that the minimum mandatory waiting period has been met after a foreclosure or deed in lieu of foreclosure
- You cannot just go off the credit report because credit reports do contain errors
- The three-year mandatory waiting period after foreclosure and/or deed in lieu of foreclosure to qualify for an FHA Loan starts from the date of the sheriff’s sale
- Or the date when the deed of the property was transferred out of the homeowners’ name into the name of the lender
The date when the homeowner surrendered the keys and the property is not the waiting period start date.
Public Records Discovered During The Mortgage Process
The waiting period start date is the date that the foreclosure is recorded on the recorder of deeds office of the county.
- Not having the correct waiting period start date is one of the most common things that can go wrong during the mortgage process where it can lead to a mortgage loan denial
- Again, just reviewing the income docs and credit scores is not enough when pre-qualifying and pre-approving the borrower
Mortgage loan originators need to carefully analyze the mortgage loan borrower’s credit report and look for derogatory information and public records, especially prior foreclosures.
When Things Go Wrong During Mortgage Process Due To Credit Disputes
Borrowers cannot have credit disputes on charge off accounts and non-medical collection accounts with an aggregate of outstanding unpaid balances of $2,000 or more. If a mortgage underwriter sees that are credit disputes on non-medical collection accounts with balances and charge off accounts, then the file is automatically placed in suspense. The borrower needs to retract the credit disputes in order for the mortgage approval process to get out of suspension and proceed with the mortgage process. However, if you retract credit disputes, the chances are that the credit scores will drop. This will create major issues for a borrower who barely meets the minimum credit score requirements to qualify for a mortgage loan. If the credit scores drop below the minimum credit score requirements, the borrower will no longer qualify for the mortgage loan which will lead to a mortgage loan denial. Again, credit disputes should be carefully reviewed during the mortgage loan qualification and pre-approval process.