No one likes the feeling of being rejected, especially when the rejection means that you might be unable to have your dream home.
That’s why, alongside putting in an offer for your house and sifting through other important paperwork, there’s another hurdle you’re going to have to get over – and that’s the underwriting process.
If you’ve already made yourself aware of the buying process, then we’re sure that you’ll already be familiar with underwriting.
But, for those who would like a refresh, the underwriting process is used by lenders as a way to determine whether or not a prospective homeowner is suitable for their loan, as well as whether it gets accepted or rejected.
After closing, the chances of a loan being denied are significantly lower than earlier on in the buying process, but seeing as it’s not something that is entirely out of the question, we’re here to talk you through some of the top reasons why loans can be denied, even after closing.
So, in order to help make sure that you steer clear of getting a rejection letter from your mortgage lender, below we’re going to be talking you through some potential loan pitfalls, and how you can avoid them to ensure that the keys to your forever home go in your pocket. Read on.
To break it down, the underwriting process occurs as soon as you’ve made your application to borrow money from them.
Employed underwriters will carry out thorough checks to make sure that you’re a suitable borrower for the loan, and will verify a variety of different factors, including your income, your current credit score, what assets are in your name, if you have any outstanding debts that you are currently paying off, as well as if you already have a property in your name.
While this might seem a little invasive at first, the underwriting practice is commonplace among all lenders and is used simply as a way to make sure that the loan is going to be in both your best interest, as well as theirs.
That’s why, during the underwriting process, underwriters will carry out all of these checks to come to an unbiased conclusion on whether or not you’re in a position to comfortably take on the financial commitment, both now and in the long term.
To break all of that down even further, your lender is essentially carrying out extensive checks to determine how much of a risk lending money to you will be.
1. A low credit score:
One of the main reasons why you might find yourself with a rejected loan after closing is due to a low credit score, or discrepancies in your report.
If you happen to have a credit score that falls below good or fair, then this may indicate to the underwriter that you may have trouble making loan repayments.
In addition to this, it may also suggest that you might be unable to handle the financial burden of taking on the loan, too.
To help avoid this situation from happening, we recommend that you take the time to make sure that your credit score is as good as it possibly can be by reviewing your credit report prior to applying for a loan.
If you feel that your credit score is too low, then it might be a good idea to hold off from buying a house until you’ve increased it to a higher rating, and if you are happy with your credit score and are confident that it will stand you in good stead, make sure that you aren’t missing any payments you have during the mortgage loan application process, otherwise, your score will drop.
2. Your employment status has changed:
Another reason that your loan may be rejected after closing could be due to employment changes.
One of the biggest deciding factors that lenders take into consideration when accepting a loan is a steady stream of income, otherwise how else could a lender be sure that you can comfortably make repayments?
If you’ve recently become unemployed, then a lender may feel reluctant to offer you a loan due to a lack of monthly income, and if you’ve recently switched jobs, a lender may be reluctant to give you a loan in case you don’t make the probation period, or dislike it altogether and quit.
3. The property you’re buying is seen as a bad investment:
Sometimes, a loan might be rejected (even after closing) if the lender is suddenly alerted to a costly issue with the property, such as improper electrical wiring or boiler problems, then a lender might pull out at the last minute due to the property being seen as a bad investment, and not worth the risk.
In order to avoid this from happening, we recommend that you take the time to thoroughly inspect the property yourself prior to making an offer, as well as a professional inspection to ensure that the property doesn’t have any major issues.
4. You’ve been unable to keep on top of mortgage repayments in the past:
If you’ve never owned a property before and you’re going to be a first-time buyer, then this won’t be a problem for you.
However, if you’ve owned a property in the past and have a record of not paying your mortgage consistently each month, then the underwriter may feel that you’re too risky to give a loan too.
5. Your DTI is too high:
Your DTI, which is otherwise referred to as your Debt-To-Income ratio is another huge factor that will determine whether or not your mortgage application goes through.
If your underwriter determines that your DTI is far too high (most lenders require below 50%) then your underwriter will likely reject your application due to the fact that you already have a large amount of debt to pay off.
For this reason, it’s a good idea to try and get all of your debts (if you have any, that is) paid off prior to applying for a mortgage loan.