Mortgage loan denied at closing

Experiencing a mortgage loan denied at closing can undoubtedly be devastating. 

Fortunately, this is unlikely to happen if your mortgage was successfully approved before you found your desired home.

Likewise, if your mortgage loan application was denied, there are steps that can save your chances of buying a home in New Jersey or another state. 

If you need legal help, contact our New Jersey real estate attorney today . 

With more than 10 years of experience in the real estate area, our firm can guide you on different real estate matters.

Reasons You May Experience A Mortgage Loan Denied At Closing In New Jersey

There are several reasons why a mortgage loan may be denied before closing:

Insufficient Credit

If you lack significant credit history, you will likely be denied a loan. 

Therefore, the first step in addressing this problem is to start building your credit history so that your lender can evaluate how you manage your credit and debt. 

In fact, improving your credit score will show that you are committed to buying a home. Plus, it can make it easier to apply for other types of mortgage loans in the future.

You Have Too Much Debt Compared To what you earn

Lenders evaluate your total debt-to-income ratio (DTI) before taxes to determine your eligibility for a mortgage. 

You could face complications if you:

• Have shared debts, or 
• Have recently paid off a debt that has not yet been updated on your credit report. 

This could result in a DTI higher than the maximum limit of 43%, which is preferred by most lenders.

The Application Is Incomplete Or Cannot Be Verified

Underwriters do not have the ability to approve a loan application if information is missing or cannot be verified. 

If your loan application has been denied due to missing or unverifiable information, it is important that you contact your underwriter for more information.

Unexplained Cash Deposit

If a mortgage lender identifies a large cash deposit, this could cause concern, as they may believe it is money given away or that it should be returned. 

Consequently, you will seek to know the origin of these deposits to be completely sure before granting a loan.

A Problem Was Found During The Home Inspection

If a major problem arises  during a New Jersey home inspection, your mortgage loan application may be denied.

Lenders usually reject the application if they determine that the home represents an unfavorable investment based on the valuation carried out. 

Job Change

If you have obtained a new job, this may be grounds for denying your application. Lenders value the applicant’s income stability and job continuity. 

Recently starting a new job may raise concerns regarding the ability to maintain the same level of income previously demonstrated. 

You Have A Record Of Late Payments

If you have been slow to make certain payments in the past, such as student or car loans, this information is probably recorded on your credit report. 

Therefore, your lender may be more cautious if you have had previous episodes of late payment on your financial obligations.

The Appraisal Value Or Condition Of The Home Does Not Support The sales price

Lenders usually reject a loan because of a low NJ home appraisal. This is more likely if you cannot negotiate a lower price with the seller and do not have the funds to cover the difference. 

You Cannot Prove That Your Income Is Stable

Most home loan programs ask for a 2-year history of consistent income and employment. 

A lender is likely to reject your mortgage loan application if your:

• Salary receipts, 
• tax returns, or 
• W-2 forms show variations in income or employer.

Unable To Verify Funds For Down Payment Or Closing Costs

Lenders must verify the source of funds used for the down payment and closing costs in New Jersey . 

Large, undocumented cash deposits may result in loan rejection.

Foreclosure

Having a foreclosure on your credit report means you will have to wait 3 to 7 years to be eligible for a conventional loan. 

Of course, in other cases the waiting period can be 2 to 4 years.

Bankruptcy

Depending on the type of bankruptcy and the circumstances that caused it, you will have to wait between 2 and 5 years to be eligible for a conventional loan.

You Are Not A US Citizen Or Are In The US Illegally

To be approved for a mortgage, you must be a US citizen, lawful permanent resident or non-permanent resident with a valid Social Security or tax identification number.

Too Young

You must be of sufficient legal age to enter into a mortgage contract. Generally, this is 18 years of age in most states.

Insufficient Reserves

Some loans require you to have sufficient reserves, which are liquid assets such as cash or stocks. These can cover unexpected expenses or loss of income. 

A Last Minute Mistake Occurred

If your mortgage loan was denied after receiving your closing disclosure, it could be due to a last-minute mistake. 

For example: applying for a new credit card, financing furniture for your new home, or another financial move that affected your DTI.

One of the most common reasons for a credit score to go down is to apply for new credit. The ideal is to wait until the mortgage loan is fully approved.

Steps To Follow If You Face A Mortgage Loan denied at closing

If your loan is denied, follow these steps before ruling out your home purchase:

1# Contact Your Loan Officer

Generally, you cannot contact the underwriter directly, but you can explain the reasons for the denial to your loan officer. 

It should be noted that you have little time to try to reverse the denial, as it becomes official only when the lender issues a rejection letter.

2# Gather All Your Documentation

Your lender should provide you with copies of everything you have submitted, including income and asset information.

3# Consult With Other Lenders

One lender’s rejection does not mean that all will do so. What’s more, some lenders specialize in loans for individuals who have:

• Credit or income problems, or
• Insurance underwriting options that allow you to approve loans that others cannot.

4# Write Or Obtain Letters Of Explanation

A lender may reject a loan due to lack of information. A well-written letter can clarify employment gaps, explain debts paid by third parties, or justify large cash deposits.

5# Consider Another Mortgage Program

Some programs have flexible requirements for applying for a mortgage in New Jersey or elsewhere. 

For example, while conventional loans require a minimum score of 620, FHA-backed loans can be approved with a lower score.

6# Find A Cosigner

If you are denied a loan due to insufficient income, a cosigner could be the solution. 

FHA loans allow a non-resident to co-sign, contributing their income. However, this individual will be responsible if you are unable to pay and any non-payment will affect your credit history.

Can I Get A Mortgage After Being Rejected?

Even if you are denied a mortgage, you may still be eligible, but you will need to explore other loan programs more suitable for your financial situation.

Check with your loan officer for information about any alternative mortgages available to you.

Keep in mind that the main reasons why a lender would deny a mortgage usually involve credit score problems, insufficient income, etc. If you were rejected, first find out the reasons and then look for solutions.

Should I Be Worried About Underwriting?

One reason to apply for a mortgage prequalification is that it provides an idea of ​​whether your mortgage application will be accepted or denied. 

However, if your situation changes drastically between prequalification and closing, the loan could be rejected at that time. 

To avoid this, stay in close contact with your lender throughout the underwriting process, so they can guide you through this.

What Is Underwriting And How Does It Work? 

Mortgage underwriting is the process of verifying and analyzing the financial information you have provided to the lender.

The underwriting process occurs when your lender verifies your income, assets, debts, credit, and property. This information is necessary to ensure that you are in a good position to assume the financial responsibilities of a mortgage.

In simpler words, mortgage underwriting helps the lender determine the risk of lending money to you.

When Is The Mortgage Subscription Carried Out?

Underwriting takes place once you have completed your mortgage application and all required documents have been submitted. Documents requested may include:

• Bank statements,
• Recent pay stubs,
• Copies of forms of identification, such as your driver’s license or Social Security card,
• Explanation letters or gift letters,
• W-2 forms and other tax documents.

Mortgage Underwriting Process

Once the subscription process has been submitted, the loan goes through the following 3 steps:

1. Conditional approval. When all your documents are under review and the subscriber feels that most of the information looks good, but there are still considerations that need to be met.
2. Approval. When the subscriber has verified everything and is authorized to close the loan.
3. Denial. When your loan application is denied.

How To Avoid A Mortgage Loan Denied At Closing?

There are several things you can do to reduce the risk of being turned down for a mortgage during the underwriting process. Some include:

Repair Your Credit Before You Apply

Pay off your credit card debt to the max and consider refinancing loans, such as co-signed car loans. 

Don’t Apply For The Maximum Mortgage Loan Amount You Qualify For

Even if you get pre-approved for a large amount, lenders still calculate property taxes, insurance, and HOA fees .

Leave some wiggle room in your debt-to-income ratio (DTI) to cover potential higher costs from taxes or HOA fees. 

Complete A Loan Application Accurately

Please provide detailed and accurate information about your previous addresses and dates of employment. 

Don’t Switch Jobs Or The Way You Are Paid

Maintain full-time salaried employment for at least 2 years to increase your chances of approval. 

Lenders verify your employment up to the day of closing, and a job change before that date may result in delays or a denial.

Get A Full Credit Approval Before Looking For A Home

Ask your lender for a full credit approval, which allows an underwriter to thoroughly review your income, credit and assets before you find a home. 

Have Your Down Payment In Your Bank Account At Least 2 Months Before Applying

Lenders typically require 2 months of bank statements to confirm that you have the necessary funds for the down payment. 

If you have it in cash, deposit it several months before applying for the loan.

Pay down As Much Debt As Possible

The less debt you have, the greater your mortgage borrowing capacity. 

Avoid using credit after you are pre-approved, as lenders recheck your credit before closing.

Apply For The Right Loan Program

Learn about the minimum requirements of different mortgages and don’t apply for programs for which you have little chance of being approved. 

If a lender doesn’t offer the program that best suits you, look for another. In general, it is easier to qualify for loans backed by government agencies such as FHA, VA, and USDA than for conventional loans.

Work With An Experienced Loan Officer

Loan officers with decades of experience often know how to present a complicated credit or income history to maximize your chances of success.

Ask About Other Types Of Mortgages

If you are denied a mortgage, you may still be eligible for other, more financially suitable loan programs. 

Consult your loan officer for more information about these alternatives.

Don’t Neglect Your Credit

Your credit score is crucial in determining your eligibility for home loans and the rates available. 

Review your credit report for possible errors that could be hurting your score.

Additionally, you can improve your credit by paying your bills on time, maintaining low balances on your cards, and taking advantage of credit improvement programs.

Increase Your Savings

Even if many reserves are not required for the loan, having substantial savings can strengthen your application and improve your chances of approval. 

If you’re struggling to save, consider down payment assistance programs or a gift from a friend, relative or employer to help you reach closing.

Select Less Expensive Locations

Not all of us can afford to live in places where the cost of living is high. Sometimes the best option for becoming a homeowner is to move to a more affordable area. 

You may also consider purchasing a condo instead of a house, a home with no HOA dues, or look for properties in areas with a lower risk of flooding or fire.

How Common Is A Mortgage Loan Denied At Closing?

According to the Home Mortgage Disclosure Act (HMDA), mortgage loans denied at closing are most common in:

• Home equity loans,
• Home improvement loans, and
• Refinance mortgage.

Can My Security Deposit Be Returned If My Mortgage Is Denied At Closing?

If you have a contingency in place that includes an offer and purchase contract, you may be able to get your earnest money back. However, if you don’t have it, you could lose it. 

Do Lenders Check Credit After Closing?

A few days before closing, the lender may review your credit to see if it has been used recently. If it detects new inquiries or open credits, it will ask for an explanation and possibly documentation.

To ensure a smooth and timely closing, avoid obtaining new credit during the home buying process. Talk to us about the do’s and don’ts of getting a mortgage.

How Can Undisclosed Debt On A Mortgage Application Lead To Loan Denial?

Mortgage lenders perform quality checks to detect undisclosed debt. 

If they discover additional debts during the process, your approval may turn into a denial or even a fraud investigation. Some examples include:

• Private Mortgages: You must report any private loans, such as purchasing a home from a relative or a rental property from a private investor.
• Recent credit applications: Notify your lender of any new credit accounts opened, even if they don’t appear on your credit report.
• Alimony or child support: These debts may not appear on your credit report, but lenders will look for them on your bank statements and paychecks.
• Payment Arrangements for Overdue Taxes or Judgments: Provide documentation of any payment plans for past due taxes or court judgments.

How Long Can You Delay Closing On A Home?

There is no maximum “time limit” for a delay in closing. However, if the sellers have included a refusal contingency or kick-out clause, they could use them to “cancel” the sale. 

Frequently Asked Questions About A Denied mortgage Loan At Closing

What Happens If I Have A Low Credit Score During Insurance Underwriting?

As long as your score meets the minimum requirements of the program you are applying for, you will not be denied the loan. However, a lower score may result in a higher interest rate and costs. 

Do Lenders Verify Employment On Closing Day?

Generally yes, but to avoid delays, let your employer know that you will receive a call before closing to verify your employment. 

Can A Mortgage Be Denied After A Closing Disclosure Is Issued?

To begin with, yes. Many lenders hire external companies to double-check income, debts, and assets before signing closing documents. 

If you have significant changes in your credit, income, or funds needed for closing, you may be denied the loan.

Can I Change Lenders?

You may be able to change lenders, especially if you have signs that your lender will deny you your loan. If so, you have the option of going with another lender.

Can You Get A Mortgage With Student Loans?

In some cases, it is possible to get a mortgage with a student loan. However, these loans can impact your eligibility as they count toward your total debt load, affecting your debt-to-income (DTI) ratio.

There are also self-employed mortgages, available for self-employed workers.

How Can Curbelo Law Help You Deal With A Denied Mortgage Loan At Closing?

Problems with a mortgage loan denied at closing can and do occur in New Jersey and other states. 

To prevent them, it’s important to take the time to figure out what went wrong and if it can be resolved. 

For someone who does not have enough experience in these cases, this can be complex and frustrating.

At Curbelo Law, we have a team of professionals with extensive experience in real estate matters in New Jersey. If you have any questions or need legal assistance, please do not hesitate to contact us.