Now that you’ve submitted your mortgage application, received approval, and have less than a week left before closing, you’re starting to feel like you can finally expire. By all appearances, you’re in the final stretch of the home buying process – only to have your mortgage go down the drain.
While it may sound like stressful nightmares, the truth is, it does happen. Even buyers approved for a mortgage can have their approval withdrawn just days before closing, or even once construction on their new home has begun.
Do you have cold sweats at the moment? Do not worry. Most canceled mortgage offers can come down to one (or more) of the common reasons – and if you know what to look out for, these pitfalls will be that much easier to avoid.
Why are home loan offers withdrawn?
Mortgage approvals risk being canceled at the last minute, as most lenders not only check your credit, income and employment at the start of the process; they typically double-check these factors within a week of your closing date. In some cases, lenders may even pull your credit report more than twice – for example, if more than four months have passed between the initial credit check and the sale of the house.
If your finances have stayed about the same or improved since you started the application process, congratulations! You are probably ready to close. But if you’ve recently become a weaker candidate on paper, you risk seeing your mortgage and home purchase crumble.
Read on to find out our top six reasons why a mortgage loan approval could suddenly be cancelled.
Top Reasons for Canceling a Mortgage
1. Job Changes
In the world of home financing, consistency and reliability are just as important as having money in the bank. Your current job and work history are crucial in this regard. Lenders not only prefer a current stable income, but a consistent two-year history in the same line of business. It’s generally a bad idea to change fields during the period between your mortgage approval and closing or to change jobs at all (unless, for example, you accept a promotion or a more lucrative role at within your profession). In addition to these suggestions, avoid moving from full-time to part-time employment, moving from wage to hourly wages, or engaging in activities that could potentially lower your income.
2. Increased debt to income ratio
You’ve probably heard of the debt-to-income ratio (DTI) if you’re considering financing a home. Your DTI is determined by dividing the monthly debt repayment amount (your bills) by your gross monthly income (your salary). Lenders prefer applicants with a DTI below 43%, with an ideal DTI below 28%. That said, there are loan options for borrowers with a higher DTI.
While lenders would be happy to see your DTI go down during the mortgage process and might even offer you better interest rates as a result, you should try to keep your DTI from going up. If you can, avoid major purchases made on credit – keeping in mind that the definition of “major” can range from a few hundred dollars to hundreds of thousands, depending on the lender’s guidelines and your income.
Also, try to avoid applying for new lines of credit during this time, as this will cause your credit report to be thoroughly investigated and increase your overall debt, whether or not you use the line of credit. Applying for other types of installment debt, like car loans or personal loans, is also risky for the same reason.
3. Missed credit payments
This one is probably obvious, but one missed credit payment can damage that all-important track record of proven financial reliability. If a lender sees that you’ve already made payments on time, only to find that you missed one (or more) after your approval, it can make you seem like a less safe bet. It’s essential to remember that payment history accounts for 35% of your credit score, and just one missed payment could lower your score by more than 100 points.
4. Increase in expenses
Whether or not you use your line of credit, make sure you don’t overspend before closing – especially if you’re using cash set aside for closing (and remember that it may appear that way on paper, either or you don’t draw on your closing funds). Make sure your future budget is prepared in such a way that your lender doesn’t raise an eyebrow at where your money is going and wonder if you can stick to a financial plan. In the event of expenses or debt incurred due to a personal or medical emergency, your lender may accept a written explanation as a mitigating factor.
5. Inattention to credit scores
Anyone applying for a mortgage needs a solid understanding of their credit score, the factors that went into it, and how they can maintain it or even improve it through the mortgage approval process. It is also useful to know how your credit score varies from bureau to bureau, as your score can vary by 50 points or more from bureau to bureau. Lenders typically request scores from the three major credit bureaus – Experian, TransUnion and Equifax – and choose the score that falls in the middle, but these practices are not standardized and can vary. Personal finance websites like Credit Karma, or Experian’s free FICO score updates, are great resources for anyone looking to unpack their credit history.
Regardless of the score your lender uses, you should be able to maintain stability by paying your bills on time – and if you want to try and increase your score, try paying down more of your existing debt. It might be worth it: if your credit scores go up during the application process and you haven’t locked in your mortgage rates yet, your lender may offer you a lower interest rate after checking your credit again . That said, not all lenders allow this, so you’ll want to check with yours.
6. Uncertain work and residence permit
If you rely on residency papers to live and work in the United States, you will need to ensure that your legal status extends well beyond the closing date. In order to cover possible delays and show your stability after the closure, you must keep green cards, employment authorization documents (EAD) and visas valid for at least 12 months after the closure. This is especially important for non-nationals who may not yet have a long-term US credit history to bolster their application.
At the end of the day, we can all agree that the last thing a buyer wants is for their mortgage to be taken out at the last minute. But it’s important to recognize that if you were offered a home loan in the first place, you have already proven yourself to be a capable and reliable candidate. The same qualities that helped you get approved can also get you across the finish line – even if you find out in the end that a little more strategy is needed than you thought. We know you’re tired, but don’t give up! You’re almost there.
At K. Hovnanian Homes, we pride ourselves on our meticulous attention to detail and excellent customer service. You can find our new build communities across the United States, each with a range of thoughtful and stunning home designs. Find K. Hovnanian communities in your state.
Learn more about financing new homes at K. Hovnanian American Mortgage, LLC.
Last updated on April 11, 2022