3 Reasons Your Loan Might Be Denied
Last week I wrote about the claim that upwards of 30% of loan applications are denied. It got me thinking about what are some of the common reasons you'd never think of that cause a problem with getting your loan approved. We all know you need decent credit, a job, and some money in the bank but there are almost an infinite number of other obscure problems you'd never think to disclose to your lender at application.
In no particular order, following are some relatively common road blocks to obtaining a home loan approval.
In our area manufactured homes are very common. For a variety of reasons these types of properties do not perform as well as a standard stick built home and options for financing are very limited. There are banks that will extend a loan on a manufactured home but I find that their guidelines are so restrictive that many can't qualify. If you own a manufactured home and are calling a lender for a new loan the first thing you should tell them is what type of property you have.
Want to move to another home and keep your current home as a rental? You'll need a lot of equity in your home, and the lender may require a full appraisal to prove it. The housing market collapse in recent years has created a new phenomenon - home owners who “buy and bail.” Yep, it's so common the lending industry has named it. Before lenders caught on, it was common for a home owner to qualify to purchase a new home while retaining their current one with a false claim it would become a “rental.” Once said home owner moved into their new dream home they stopped making payments on the old home and let it fall into foreclosure.
Why would they do this? In high cost areas like Western WA or California you had people that borrowed $400k for a home in 2006 that is now worth about $150k. They quickly figured out they could purchase a much nicer home today for $400k (that was worth $600k in 2006), move to the new neighborhood, and then never make another payment on the old home. There's no fear of the foreclosure on their credit record because they've already moved to the new dream home.
So lenders reacted and changed the qualifying rules. They now take a very hard look at the equity in your current residence if you tell them you plan to keep it after moving to the new home. If you have 25% to 30% equity in your home, there's probably no problem. But if you have no equity or are upside down then you'll need a lot of compensating factors in your file to obtain an approval.
If any part of your income is overtime, bonus or commission you'll need a two year history of earnings or it can't be used for qualifying. In addition, the amount received needs to be fairly consistent over the last two years. If there's a declining trend you may not be able to use it. Why the two years average? Presumably the variable income will remain consistent in the future if you've got that long of a history. You will want to separate out any variable earnings from your base wages and report it this way to your lender as soon as you apply for a loan. Often times this is the kind of thing an inexperienced loan officer will overlook and it won't get caught until the Underwriter is analyzing your pay checks and sees the “OT” or some other line item on your pay check stub.
Lending guidelines are extensive, always changing, and most are subject to interpretation by Underwriters. Your loan officer's job is to ask you good questions upfront to uncover any unforeseen obstacles to your loan being approved.
Michael has 21 years' experience in the lending industry. In that time he's directly helped over 1,400 families finance the purchase of a new home or refinance an existing loan. Rebecca has a CPA background in auditing financial institutions which brings an incredible resource to First Priority Financial. They are licensed to help families in the states of WA and CA. If you, or anyone you know, needs help with a home loan call 509-252-9151 or send an email to MMullin@TheLoanConsultant.com.