Ever witnessed a puppy being abused? It's probably about the same feeling of disappointment.
If you’ve been in the industry long enough, you’ve likely encountered a scenario where your buyer’s lender broke the news that they would need to deny the loan application. I don’t know about you, but to me, this is almost as bad as witnessing a puppy being abused. It’s absolutely terrible.
This is always devastating news, but it does not always mean that there isn’t a solution. The primary loan denial factors listed below almost always boil down to one of the two following root causes:
Inexperienced lender
Poor communication between buyer and lender
Inexperienced lenders simply don’t know what they don’t know. As an agent, it’s wise to vet out the lender and determine their level of experience. My article shares key points to look for when assessing a lender’s level of experience.
Inexperienced buyers simply don’t know what they don’t know. But it is the lender’s responsibility to educate the buyer on the dos and don’ts of the home buying process prior to preapproval. If your buyer’s lender doesn’t answer your call or return your messages, that’s red flag. Run.
If you’re under contract and feel obligated to work with a specific lender who is mentioning loan denial, it’s like for one of the following reasons below. Assuming the lender put any effort at all into the preapproval, then there may still be a chance to save the deal. First and foremost, verify if your buyer is still within the finance contingency period. Then, review my solutions below. It may require some work, but it's likely worth saving the deal for you and your client.
Problem #1: No money for down payment or not enough to cover closing costs
Solutions to consider:
Loan type (changing from conventional to FHA will require a lower down payment)
Retirement/Investment account (withdraw cash from one of these accounts)
Discount Points (eliminate discount fee, increase the rate, use the cash for down payment)
Owner’s Title Insurance (this is optional, waive it)
Gift Letter (receiving a gift from a family member or spouse can be used for down payment)
Sale of an Asset (show proof of sale of asset, i.e. car, motorcycle, boat, etc…)
Move closing (push closing to last day of the month, minimize pre-paid interest)
Close before 6th day of the month (interest credit)
Problem #2: Debt to Income is too high
Solutions to consider:
Homeowner's Insurance aka "HOI" – (get another quote, increase the deductible)
Pay off debt (lowest balance with highest payment first)
Gross up non-taxable income (a lender can increase non-taxable income by 25%)
Buy down the interest rate (especially in a rising rate market)
Negotiate with underwriting to recalculate income (reconsider overtime/bonus/future pay)
Compensating factors (i.e. excellent credit, 3+ years PITI assets, historic positive income trend)
AUS (underwriters are willing to accept more risk with AUS [approve/eligible] findings)
Loan type (changing from conventional to FHA or VA may allow for higher DTI tolerances)
Problem #3: Credit score challenge
Solutions to consider:
Loan type (changing from conventional to FHA or VA may allow for lower credit score)
Credit bureau dispute (contact CRB and creditor/collection agency to remove from credit)
Experian.com (Experian Boost – have landlord report rent history to Experian)
Exception request (submit request to underwriting with compensating factors)
Problem #4: Buyer’s contingent home sale fell through
Solutions to consider:
Revisit eligibility (DTI/AUS) with both mortgages
Get lease agreement in place of home sale
Request early occupancy (ask seller to move in, rent home until current home sells)
If you have addressed every solution listed above and still can’t figure out how to get loan approval, give me a call.
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Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the home buying process across America.
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