Experiencing a mortgage loan denied at closing can undoubtedly be devastating. In this blog you will find out what this really means and how you can avoid it.
First of all, you should know that there are steps you can take that can save your chances of buying a home in New Jersey. If you need legal help, contact our NJ real estate attorney today. With over 10 years of experience in real estate matters, the firm can guide you in different processes.
Mortgage loan denied at closing In New Jersey
There is a difference between prior approval and credit approval as such. Preapproval for a loan is just one step in financing a home. This is when the lender performs a credit check to confirm if the applicant is financially capable of repaying the loan.
Most home sellers want to know if buyers are serious and can request a pre-approval letter to move the deal forward.
- Loan approvals occur after the applicant has found their desired type of house in New Jersey;
- Subsequently, you will submit an offer and if it is accepted, you will apply for a mortgage.
Mortgages generally rely on a property appraisal and inspection. A pre-approval increases your chances of getting an approval, but does not guarantee it.
Is this your first time applying for a loan? Have you already applied for several and have not been able to qualify for one? Our blog on what not to do when applying for a mortgage will help you properly prepare for these applications.
Reasons Your Lender Can’t use to Deny Your Mortgage
Lenders may reject a loan application for many reasons. Likewise, there are reasons that they won’t be able to use as valid arguments to deny the mortgage loan:
- Age (assuming you are already of legal age).
- Civil status.
- If you receive public assistance.
It is very unlikely that a lender will reject a loan application for the above reasons. However, if so, applicants can get help from the Attorney General’s office in their respective state. For the state of New Jersey, the office is located in the city of Newark.
What Happens If They Deny The Mortgage Loan?
If the mortgage application is denied, an explanation must be requested from the lender. By law, lenders are required to provide such information, along with a disclosure of the credit score on which they relied for that decision.
What Is Underwriting And How Does It Work?
Mortgage underwriting is the process where the financial information provided by the applicant to a lender is verified and analyzed. The underwriting process occurs when a lender verifies an applicant’s active income, debt, credit, and property.
Underwriting occurs when the mortgage application is completed and all required documents are submitted for review by the underwriter. The requested documents can be:
- Bank account statements.
- Form W-2 and other tax documentation.
- Receipts of recent payments.
- Copies of identification forms.
Once the subscription process has been submitted, the loan goes through the following 3 steps:
- Conditional approval. All submitted documents are under review and the underwriter feels that most of the information looks good, but there are still considerations that must be met before the loan is approved.
- Approval. When the underwriter has verified everything and is already authorized to close the loan.
- Denial. When your loan application is denied. Below we will delve into the reasons for the latter.
Common Reasons A Mortgage Loan May Be Denied At Closing
It is important to know the reason why a mortgage loan is denied. Here’s a look at some of the most common reasons for loan denials and how to avoid them.
1# Having A Credit Score That Is Too Low
Before applying for any loan, it is important to have your credit score checked. A low credit score tells lenders the following about the applicant:
- They represent a very high risk investment;
- They may have trouble paying on time or keeping up with the financial responsibilities for the loan.
The FICO credit score is the most used by lenders, so if the applicant’s credit score is low, it is very likely that the loan application will be rejected.
Generally, a credit score of at least 620 points is needed to qualify for a conventional mortgage.
2# Having A History Of Missed Payments On Mortgage Loans
If the borrower previously owned a home, the underwriter may require to see evidence that the borrower paid the mortgage on time and consistently. If you don’t do this, they may not consider it worth the risk of getting a loan approved for the new property.
Having a foreclosure or short sale on record can affect a mortgage approval for a certain period of time.
3# The Appraisal Is Too Low
Lenders cannot lend more than the appraised value of the home. If the appraised value is less than the sale price, the difference must be paid or renegotiated at a lower price. If neither of the two can be done, the loan will be denied.
4# Unusual Bank Account Activity
Buying a house involves a large number of costs that must be paid, in addition to the mortgage. These costs include NJ closing costs, home insurance, flood insurance, taxes, and homeowners’ association fees.
In most cases, lenders will need to see that the borrower has enough money to cover these expenses for up to 6 months.
However, large deposits (especially from unknown sources) can alert lenders. This could indicate that the borrower took out a loan to pay a down payment, which adds to their debt-to-income (DTI) ratio.
If you are receiving a significant amount of money as a gift, the donor must provide a “gift letter” explaining that the money is only a gift and does not need to be repaid.
5# Existing Problems With The Property
The results obtained by an inspection can increase or decrease the chances of getting a mortgage loan. For example, if you obtain a loan from the Federal Housing Administration (FHA), the home must meet certain criteria to qualify for the loan, otherwise the FHA loan will be rejected.
If an appraisal inspection uncovers a significant problem such as a bad foundation, the loan may be denied. This is because the house is considered a bad investment.
To avoid these possible scenarios:
- Check the house in person;
- Pay due attention to housing disclosures.
It is important to carry a New Jersey home inspection in a timely manner to avoid wasting time. This can be key to preventing your mortgage loan from being denied at closing.
6# Your Employment Status Has Recently Changed
Having financial stability is often one of the main requirements to apply for a mortgage in New Jersey. When you receive a fixed paycheck, you will most likely be able to pay your monthly mortgage payment. However, losing a job before closing a mortgage can cause the lender to question whether the loan can be repaid.
A new job can bring many uncertainties, since the loan applicant can:
- Be fired.
- Have a much lower salary.
These cases can affect the approval of a mortgage loan, even though it was previously pre-approved.
Loan applicants switching from one job to another in the same field at the same or higher salary would generally have no problem with their application.
7# The Loan-To-Value (LTV) Ratio Is Very High
The loan-to-value (LTV) ratio compares the mortgage balance to the value of the home. When a home is purchased, the LTV is reduced along with the down payment. Also, certain loans require specific LTV and down payments.
- For example, conventional loans require a minimum down payment of 3% or 97% LTV.
- In case of not meeting the minimum initial payment, the loan cannot be obtained.
- To avoid this problem, take the time to save a down payment of at least 3 to 3.5%, which depends on the loan.
For workers seeking self-employment mortga loans or who have negative circumstances, a large down payment can help ease a lender’s worries.
8 # The Debt-To-Income Ratio (DTI) Is Too High
- The DTI ratio helps lenders determine if the loan applicant can take on more debt.
- If the DTI is high, you may not be able to repay the loan.
- Most lenders require a DTI of less than 50%.
- For most potential loan options, it is recommended to keep the DTI at or below 43%.
- If you have a lot of debt, it’s important to work to pay it off before you apply for a mortgage.
Once you are in the process of obtaining a mortgage, it is not a good idea to add more debt by making large purchases that are not related to the purchase of the home. By eliminating some of the debt, you increase your cash flow and show the lender that you have enough money to pay the mortgage.
9 # Taking out New Credit
If your current credit score goes up, there’s usually no problem, but if it goes down before you close, it could lead to a denial.
One of the most common reasons a credit score drops is when applying for new credit. The best thing is to wait until the mortgage loan is fully approved.
10# Insufficient Documentation Of Income Or Assets
Lenders require checkbooks, W-2 forms, tax returns, and bank statements to prove your income and assets. If such documents cannot be provided, your loan will not be approved.
11# You Are Too Young
To qualify for a loan, you must be of legal age to take out a mortgage contract (18 years old in most US states).
What Should You Do If You Receive A Mortgage Loan Denied At Closing?
Here’s what to do after you get conditional approval or a mortgage denial:
Determine The Current Closing Phase
When A Conditional Approval Is Received
- During this stage, loan applicants may be asked to provide further documentation.
- You must ensure that you respond to these requests as quickly as possible so that the process can continue.
- The insurer cannot proceed until they receive the requested documents.
At this stage, the applicant must be honest in the face of any type of problem. This moment is crucial. Therefore, continue to make all payments on time, avoid making large deposits, taking out loans, and using credit to make other purchases.
When Your Loan is Denied
If you receive a loan application denial, there are some steps you can take to put yourself in a better position to obtain a mortgage in the near future. For it:
You must understand why the loan was denied and then find a solution.
- If the DTI was too high, the solution is to pay off the debt.
- In the event of a credit score that is too low, all payments must be made on time.
- If the LTV is too high, you should take that time to save up for the down payment.
Talk To The Lender
Under the Equal Credit Opportunity Act, lenders are required to disclose the reason for denying applications. These often include a letter with specific details, but if the letter is vague or inaccurate, it’s best to contact the lender directly.
Establish A Credit History
First-time homebuyers in New Jersey may not have sufficient credit history to meet lenders’ requirements. In these cases, it is recommended that they establish a credit history before submitting a loan application.
Check For Errors In The Credit Report
Between the different credit bureaus and creditors involved in developing a credit report, errors are likely to occur in the process. Mistakes can lower your credit score and be a problem to fix.
Such errors may include:
- Outdated information.
- Incorrect payment statutes.
- Wrongfully duplicated negatives.
- Fraudulent accounts.
To eliminate any possible errors, reviewing the credit report on time can allow you to take the appropriate measures to avoid such mistakes.
Monitor Your Credit
The best way to rebuild credit is to monitor it regularly through credit report and score checks. There are several online sites that allow you to do this for free.
In addition, it is also recommended to keep track of monthly debts and credit utilization to know where adjustments are required to improve the score.
Pay Down and Diversify Debt
One of the best options for improving your credit score is to pay off any debt and pay off any charges that appear on your credit report. If you cannot pay the full balance, a good idea is to reach an agreement with creditors to pay as much as you can.
While this doesn’t raise your credit score as much as paying off debts in full, paying something is better than nothing.
Another key to increasing your score is having a good mix of revolving credit debt and items like term loans.
Keep Accounts Open
When paying debts, it is important not to close the accounts. Doing this can hurt your credit score.
It may be beneficial to have a combination of credit cards, student loans, potential personal loans, and auto loans, where credit management can be demonstrated.
Increase Credit Limits
Another way to rebuild your credit score is to increase your credit limits. For example, if you have a credit limit of $1,000, a lender might be willing to increase it to $2,000, as long as they see the progress the applicant has made.
Keep Credit Utilization Low
To maintain a high credit score, it simply should not be used. Your credit usage is tracked in the form of credit utilization, which shows your current debt as a percentage.
For example, if one credit card has a limit of $3,000 and another has a limit of $5,000 and with a total transfer balance of $1,000 per month, the credit utilization is 12.5% ($1,000/$8,000).
It is generally recommended that you use no more than 30% of your overall credit limit across all accounts.
Build Your Application Before Reapplying
If your home loan application was denied, you may have to take several steps to repair it. There are few ways to immediately correct problems an underwriter finds on a mortgage application.
If you are denied a mortgage, it will probably take some time to get your application sorted out. Ideally, you should not immediately reapply without addressing the issues that arose the first time you got a denial.
Find A New Home
If the loan was denied, the house may not be right for you to live in right now. Perhaps looking for others at a lower price may be a better option.
The less expensive houses tend to be more comfortably paid by the borrowers. Therefore, the less borrowed, the more money a borrower can put down, and the lower the monthly costs.
Find A New Lender
It is recommended to compare lenders to see which one offers the lowest interest rate, different payment terms and the fewest possible fees. The more lenders are compared in advance, the more likely it is to find a loan that fits the needs of each applicant.
How To Avoid A Mortgage loan denied at closing?
In addition to the tips already explained in this article, there are other actions that can be taken to avoid a loan rejection. These are some of the additional measures to take into account to increase the chances of getting a loan approval:
1# Search For A Co-Signer
A co-signer can help an applicant obtain a loan. However, someone is being asked to risk their credit score. Ruining someone’s bail can destroy the existing relationship between both individuals. Before involving someone in a loan, you should consult with the lender about the guidelines required for it.
2# Look For Less Quantity Than the one You Can Pay for
Most buyers are looking for a home with the maximum amount of money the lender will give them. However, one recommendation is to apply for a loan that is less than what could be obtained when approved. This way, there will be some wiggle room in the budget to repay a loan.
In addition, it is ideal not to request the maximum amount of the mortgage loan. This is because when you get pre-approved for a home loan, lenders calculate property taxes, insurance, and HOA fees. Failure to leave enough wiggle room for DTI on a property tax bill could result in a loan denial.
3 # Prepare Yourself Before Applying
It is important to have all the necessary documents ready for a mortgage loan. The quicker you can respond to a request for information, the quicker you’ll have a mortgage approval.
4# Fill Out The Loan Application Completely And Accurately
It is important to provide the lender with the most accurate information possible to reduce the chances of the pre-approval being denied in the end. Whether it’s a previous address or the start and end dates of previous employers, take the time to submit the proper information.
5# Don’t Switch Jobs Or Change how you are currently Being paid
Receiving a full-time salary for two years provides a higher chance of a credit approval. Lenders verify the borrower’s employment up to the day of closing, even if the borrower changed jobs before closing, it could delay or even lead to denial.
6# Apply For The Right Loan Program
Take your time to read the minimum requirements to obtain a mortgage loan. Therefore, do not apply to a program where you have little chance of getting approved.
Loans backed by government agencies like the US Department of Agriculture (USDA), the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA) are typically the easiest to qualify for compared to conventional loans.
Frequently Asked Questions About a Mortgage Loan Denied At Closing
Although rarely, a mortgage loan can be denied after the borrower has signed the closing documents. In addition, borrowers have a 3-day right of rescission, during this period of time, they can withdraw from the loan.
According to mortgage data company HSH.com, denied mortgage applications hover around 8%. However, denial rates may vary by location.
If feedback is received that the underwriter might deny a loan, it is possible to apply with a new lender.
As long as the credit score meets the minimum requirements for the program applied for, you will not be facing denial. However, the interest rate and costs could increase as a result of a lower score.
How Can Curbelo Law Help You With A Mortgage Loan Denied At Closing?
Problems with a home loan denied at closing can and actually happen in New Jersey and other states. To avoid these, it is important to take the needed time to find out what went wrong and if it can be resolved. This for an individual who does not have enough experience in these cases can indeed become complex and frustrating.
Our real estate experts at Curbelo Law can help you in this scenario by showing you the resources available to you before closing day arrives. With over 10 years of experience in New Jersey real estate, you’ll be in the hands of professionals.