So you made an offer on a home, it was accepted, and now, you’re ready to close. What could go wrong?
Well, unfortunately, quite a few things can go wrong after you're cleared to close, and the deal can still fall through. Here are some things to watch out for when getting your mortgage:
There are numerous reasons a deal could fall through on or after closing day, including buyer’s/seller’s remorse, missing documents, and more. But it’s also possible your loan could be denied at the last minute. And you, the buyer, don’t have financing, the deal is off. Let’s explore some of the reasons your loan could fall through after closing.
An appraisal is an objective, professional estimate of a home’s market value. It is determined by a trained, licensed or certified appraiser who evaluates the home and establishes the home’s value based on a number of factors, including location, condition, the current market, etc…The appraisal is required by the buyer’s mortgage lender because it determines how much the lender is willing to loan you. There’s a difference between a home’s value and what you are willing to pay for it. The lender will not give you a mortgage beyond the value of the home. If the appraisal comes in lower than the selling price, you will be responsible for the difference. If you can’t afford that, the deal could be off, unless you can negotiate a lower selling price.
In addition, the appraisal affects your loan-to-value (LTV) ratio, which tells you how much of your home’s value you are borrowing. It affects your interest rate, your monthly payments, your closing costs, the kinds of loans you are eligible for, whether or not you need to pay for private mortgage insurance (PMI), etc… If your LTV ratio is too high, that is a red flag to your lender, and you may have to make a larger down payment to compensate. That is if the loan isn’t denied. So, clearly, a low appraisal can have a big impact.
The inspection is an important part of buying a home because it protects buyers by identifying any hidden problems with the home and gives them an opportunity to back out of the purchase. The inspection could find something as minor as a missing deck board or as major as a leaky roof. It could also reveal issues that could impact their health and safety, like mold, dangerous wiring, radon, etc...
The inspection is also a requirement of mortgage lenders, as most lenders will not grant a loan without one. The lenders look at it from a purely practical and financial standpoint--if the inspection reveals a serious problem like faulty wiring or structural issues, they may deny the loan, because the home is a bad investment. You and the seller may agree to make the necessary repairs. But if not, the loan could stall.
Few things can scare a lender off more than a last-minute change to your finances. If you went on a furniture shopping spree to fill your new home, that would be a major red flag to the lender. Making big purchases and charging large amounts to your credit card alert your lender that you may not be a responsible borrower.
Applying for more credit (i.e. applying for another loan or a new credit card) are also red flags. It will cause your credit score to drop, which could cause your loan to be denied or even cause a hike in your loan’s interest rate. The same goes for any new issues with your credit report, such as having debt in collection.
Having an increased debt-to-income ratio is also a concern for lenders. Your DTI ratio indicates how risky it is to give you a loan and tells them how much of your income goes toward your debt. Adding new debts, such as credit cards or a car loan, can increase your DTI ratio and scare your lender off.
In addition, another issue that could cause your loan to be denied at the last minute is the sudden loss of a job, because they may think you can no longer afford the loan. Not having enough “cash to close” is another reason your loan could be denied at the last minute. You as the borrower need to be able to afford the down payment and closing costs while also saving several months' worth of expenses just in case. If that’s not the case, you could be denied. As you can see, any change to your finances could have a negative impact on your loan. So the best thing you can do while waiting for your loan to officially go through…is nothing.
A home/property’s title determines who has ownership of the home and who legally has the right to sell it. Before granting you a loan, your lender will do a title search on the home you are purchasing to ensure that everything is in order with the home and that there are no liens or problems with the deed. A title search could turn up issues such as bankruptcies, child support liens, unpaid taxes, and ownership claims on the home. The sellers will have to settle all issues before they can sell the home.
While loans falling through after closing may not be the norm, it does happen. And unfortunately, some things will be out of your hands, like title issues. But there are many things in your control, such as not making big purchases or applying for new credit. Then you can rest easy knowing you did everything you could to get your loan approved.