I’m a Mortgage Lender: 5 Red Flags Your Financing Will Fall Through Before Closing

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According to recent data from the Mortgage Banker’s Association, the median national mortgage payment was $2,256 in April, a 6.8% increase from one year ago. With mortgage payments becoming more expensive recently, you’ll want to be extremely careful with your application if you’re looking to purchase a home in the near future. 

What are the red flags that your financing will fall through before the closing date? 

Red Flag #1: You Leave Your Job or Your Income Drops

The biggest issue that could cause your financing to fall through before closing is a major change in your financial situation, like losing your job or retiring. If you get terminated, choose to quit or retire, this will show the lender that your income has drastically changed from the original application. This will likely lead to your financing falling through before closing, as it’s generally recommended that you don’t make any employment changes during the process. 

“If you’re purchasing a home, you must be employed or have income coming in,” noted Renee Guidaboni Coleman, a loan officer/CDLP at CrossCountry Mortgage. “If you put your retirement papers in while in the process of buying a home, your lender is going to do a final verification of employment with your employer. If they say you’re retiring, your loan will not be approved.”

You want to ensure that your income remains stable throughout the mortgage application process because lenders want to see reliability. 

Red Flag #2: You Make a Big Purchase or Finance Something

If you decide to finance a vehicle or make any major purchase that could affect your credit or monthly budget, your lender may back out of the deal. Lenders could be scared off if they see you’ve applied for new credit. Making a large purchase or applying for a new credit type will indicate to the lender that you’re not a responsible borrower or may be unable to afford the mortgage payments. 

“A lender looks at your DTI (debt-to-income) ratios as a qualifier for your mortgage,” said Guidaboni Coleman. “If the rate increases, your mortgage payment increases, and therefore your DTI increases.”

Your DTI ratio shows lenders how much of your income you have to spend on debt payments, and increasing this by adding new debts is a major red flag.

Guidaboni Coleman added, “If you exceed the maximum DTI for your loan program, you’ll need to either increase your income or lower your debts in order to get your DTI back to acceptable levels.” 

Since increasing your income in a short period of time is unlikely, the best option is to lower your debts by paying off an existing credit account or limiting how much you borrow. 

Guidaboni Coleman stressed that a good lender will remind you during the mortgage process that you shouldn’t apply for any new credit. People often get excited and start purchasing furniture for their new place before they’ve even closed the deal. 

Red Flag #3: Low Appraisal

Your lender will acquire an appraisal of the home through a professional to determine how much they’re willing to lend to you for the mortgage. Most lenders will not give you a mortgage for more than the home’s worth based on numerous factors like the location of the home, the current market and the condition. 

“If your appraisal comes in short, depending on how your purchase contract is written, you may have to come up with additional funds in order to get financing,” remarked Guidaboni Coleman. “A lender can only finance on the lesser of purchase price or appraised value. If your contract says you will cover any appraisal gaps, that means you’d have to come up with additional funds.”

Red Flag #4: Home Inspection Issues

A home inspection is critical to closing a home mortgage, so if any major issues come up, the lender could pull the financing. The point of the inspection is to protect the buyer by discovering any issues with the home so that they don’t end up purchasing a place that requires an additional capital investment.

While some issues could be minor, like a missing tile in the backyard, significant challenges could also appear. For example, a leaky roof or dangerous electrical wiring could make the home difficult to live in immediately. A buyer may overlook cosmetic issues, but structural or safety defects must be addressed. 

The buyer can request the seller to address the issues, but the financing can fall through if the problems are very expensive or time-consuming to resolve. Your lender won’t want to loan you the money for a home requiring another hundred thousand in repairs. 

Red Flag #5: Issue With the Property Title

Before releasing the funds for your mortgage, the lender will do a title search on the home to ensure there aren’t any concerns, such as anyone else having a legal claim to the property. For example, if the IRS or a relative of the seller has a claim on the property, the mortgage financing will fall through. 

Mortgage Closing Finances 101

If you’re about to close a mortgage in the next few months, here are a few things you’ll want to remember:

• You shouldn’t make any major changes to your financial situation.
• You’ll want to avoid picking up any credit card debt or debt in general.
• Try not to apply for any new credit.
• Don’t quit or change your job during the process. 
• Don’t apply for a mortgage if you’re retiring before the closing date.
• Don’t spend your savings on purchasing items for the home.

Guidaboni Coleman concluded, “In this volatile rate market, you may qualify one day but not the next. If your numbers are tight, and the rate increases, it could throw off the loan qualification, and your loan could get denied.” 

You’ll want to work with a trusted mortgage lender to ensure that you have guidance along the way so that your financing doesn’t fall through. 

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