Here’s a warning a lot of people wish they’d heard earlier:
You can lose your home loan pre-qualification and even your loan approval midway through the loan process.
Not only that, but you can lose your approval right up until the last minute – when you’ve got your household boxed up and you’re ready to move. You can even lose it after you’ve signed loan papers and are waiting to get word that the bank has distributed funds to the seller. Here’s what I mean…
Jan Little was very excited about the condo she was buying. It was going to be her first home. She was looking forward to new independence and having her own piece of real estate. Everything was going along great, right up until the signing. Then, she got a call from her loan officer:
“I’m sorry, Jan, but we have a problem. It looks like your financing has fallen through.”
At first, Jan couldn’t believe her ears. How could this happen? Jan wasn’t the only one. The Sanchez family was packed and ready to move out of their rental into their first house. They were scheduled to sign in two days. Suddenly, their loan fell apart. It happened to Billie Baker too. In her case, she’d already signed the loan papers. She was told they were just waiting for a response from the county recorder before the house would be hers.
Can they do that?
When something unexpected like this happens, the first question the home buyer usually asks is, “Can they do that? Can they take away my loan after I’ve already received a commitment letter in writing?” The answer is, yes. Here’s why. More importantly, here’s what you can do to prevent it from happening to you.
Why Good Loans Go Bad
When your loan is approved, and a lender makes a commitment, that approval and commitment come with a list of requirements called, “conditions.” And, unless each and every one of these conditions is met, they can withdraw the loan offer at any time. Let’s look at the three examples we just talked about in more detail, because one of these could apply to you or to someone you know:
It took Jan Little a couple of months to find the right condo. When she finally did, her Purchase and Sale Agreement stipulated a 30-day closing. For most applicants this is considered a typical expectation, but here’s the catch: just before the bank was ready to have the loan papers drawn up for signing, the lender pulled an updated credit report. This is a very standard practice. To everyone’s surprise, an old unpaid cell phone bill suddenly popped up as an $87 collection account, causing her credit score to drop by 50 points. With the new, lower credit score, Jan no longer qualified for the loan and she lost her condominium. The lesson here is that you must keep your credit qualified. If there’s an “old skeleton” in your credit closet, it could show up on your report. You can’t afford to ignore those old bills like Jan did.
The Sanchez family lost their financing because it was discovered that their loan application wasn’t 100% accurate. Mr. Sanchez started his own business, and on the loan application where it asks how long you’ve been at your business, he rounded up to “two years.” One of the conditions on the loan was for a business license, which is standard for self-employed people. Mr. Sanchez didn’t get around to sending a copy of his business license until the last minute. That’s when the surprise occurred. He’d actually been in business for a year-and-a-half. Loan denied! In most cases, a self-employed person must have been in business for a minimum of two years. The lesson here is to get your lender what they need as fast as possible. That way, any potential issues can be addressed upfront when there is time to deal with them.
Billie Baker’s case was especially frustrating. There was no reason in the world that she should have lost her loan and her house after signing final loan papers, except that she made one fatal decision. Unfortunately, Billie couldn’t stand her job. She had a mean boss and couldn’t wait to get away from him, so she was looking for another position. The day after she signed loan papers her boss pushed her buttons and Billie quit.
Just a couple hours later, an assistant working for the lender picked up the phone and called her now former boss to verify employment.
“She just quit,” said her boss. Now the bank had a home buyer with no income. The underwriter called the escrow company and let them know the loan was denied.
All of these stories are true. These are real people who lost their financing. The lesson in Billie Baker’s case is that your loan isn’t done until the funds for the home are paid to the seller or their escrow. They can still deny your loan, even if there’s one minute to go. Had Billie known this, she could have waited to change her employment.
There are other situations where you could lose your loan at any point in the process. The good news is that you have the power to prevent yourself from being a victim. Below are some general tips that apply to almost everyone and can help you keep your qualification status secure:
12 Tips for Keeping Your Qualification Status:
1. Keep on top of your credit status
Don’t let a nasty surprise like an unpaid bill or erroneous information show up on your credit report. Protect yourself by keeping a close eye on your credit report. The best way to do this is with automated credit monitoring and alerts. This is your first best line of defense.
2. Don’t apply until you are confident you have the right lender
Avoid the temptation to second-guess yourself and continue applying for loans online. Even if it’s “just to check,” fight the impulse once you receive an offer. Multiple credit inquiries spread out over a few weeks could cause your score to go down. At least there is some good news on this front. If you are shopping specifically for a home or auto loan, you receive a 30-day “shopping” period to apply for loans without being penalized by credit report inquiries.
3. Don’t hide your skeletons
If you’ve had some negative credit in your past, such as an old judgment or lien that could appear on your credit report, discuss it with your loan officer. They have a vested interest in making sure your financing goes through. And they will likely have suggestions for you. However, your loan officer can’t help you if they don’t know about it.
4. Report accurate income
Let your loan officer know if your income changes. An increase in income could, in some cases, qualify you for better interest rates.
5. Keep your pay stubs and tax returns
You’ll need your most recent income documentation, so be sure to file everything and make copies. Never give away your only original.
6. Locate your bankruptcy papers
In some cases, if you have a bankruptcy in your past, the lender will ask for documentation. You’ll need your final discharge and schedule of accounts that were included in the bankruptcy.
7. Don’t let those bills slide
A new late payment is one of the worst things that can happen to your credit. Paying your bills on time can affect your credit score by as much as a whopping 40% percent.
8. Stay on top of your checking account
Too many non-sufficient funds (NSF) or overdrafts on your checking account can cause a denial, even if you have overdraft protection. Some people think it’s okay to write NSF checks because their bank protects them. The NSF checks still show up on your statement and lenders don’t like this. It may weigh heavily against you.
9. Maintain your employment
It’s OK to accept a better job or better position, but lenders don’t like to see gaps in employment. In general, a two-week gap is okay, but six months is too long. Avoid looking for or changing jobs while you are shopping for loans.
10. Pay your rent with a check
If you’re a first-time home buyer, you’ll probably be asked to show that you have paid your rent on time for the past 12 months. The best way to do that is with canceled checks. Paying with cash may be perceived as a problem and can force you into a higher interest rate sub-prime loan.
11. Avoid new debt
This is another common reason people lose their home loan before it closes. New home buyers with an approval for a home loan sometimes start purchasing items for the house on credit. Sometimes they get caught up in the new beginning they are expecting and will even finance a new car! A new auto loan or other obligation can push your debt ratio out of the appropriate range needed for your home loan approval. Wait until after your new home loan has been funded before you seek auto financing or other loans. Just like the examples we’ve discussed, if the lender sees you’ve been applying for credit, your debt ratio can come into question. How do they know? By looking at the inquiries on your credit report.
12. Save money like crazy
Most home loans will require you to prove you have a certain amount of money in your bank account for rainy days. These are commonly called “reserves.” Better to save like crazy than to go crazy because you’ve lost your pre-qualification status.
It’s easy to get caught up in the excitement of a new home, but make sure you are in good credit shape before you apply. Don’t forget that the bank can deny the loan seconds before signing if they notice last minute changes in your credit or employment. And always monitor your report and activity with the expectation that something wonderful may be around the corner, and you may want to leverage your good credit.
© 2019 Identity Intelligence Group, LLC
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