How to lose a loan in five easy steps

Some of the most frequently asked real estate questions I get have to do with qualifying for a home loan. What types of things should a homebuyer do in order to improve their score, and what do lenders consider when approving loans, beyond credit issues? Fortunately the formula for qualifying and staying qualified for a home loan is pretty simple. I know from a decade of selling homes some of the major problems that confront homebuyers in the process of obtaining a loan, but I wanted to hear it straight from a group of underwriters. Ultimately they are the people you need to give you their stamp of approval in order to close on your new dream home.

Dan, Lillian and Carolyn with Fairwinds Credit Union were kind enough to compile a list of the top five reasons consumers are denied for home loans. I’ve paraphrased their responses below and added my thoughts on the matter. Issues are ranked in order of frequency of occurrence.

1) Credit issues

I’m frequently asked what the minimum credit score to obtain a loan is. Generally speaking most lenders prefer a score above 620. Obviously the higher the score the more favorable lending conditions for the borrower. Late pays can really put a dent in your score so make sure you pay all bills on time, even the small ones and especially while you are house hunting. No buying expensive new cars or large furniture items on credit either. That leads us to the next point.

2) Debt-to-income ratios

In most cases your debt to income ratio should be under 43 percent to meet new qualified mortgage regulations. For those who are self-employed this is a very important part of the qualification process. Your income will be calculated on what you claim on your tax returns, so watch those write offs.

3) Asset verification

Make sure you have the funds you need to close in your account! Large cash deposits can raise a red flag, so no keeping money in a mattress only to put it in your account two weeks from closing! I’m making light of the situation here, but seriously. Be prepared to explain your deposits, and if at all possible make any such large deposits a couple months before heading to the closing table. Another important fact underwriters consider: do you have enough liquid assets to cover your down payment, closing costs and a few months of the mortgage? If the answer is no, start saving now.

4) Appraisal issues

Sometimes a home doesn’t appraise for the contract price. This is generally a known issue in a situation, and your Realtor will be able to provide you with a market analysis to show you what similar homes are selling for, hopefully helping you avoid this entirely. Nonetheless this issue does still crop up from time to time. Some buyers are OK with this if they love the home enough and it has special features. Just be aware, the lender is not lending over and above the value their appraiser gives the property. So do your homework and ask your agent about nearby home values to avoid this potential pitfall.

5) Income verification

This is crucial. What a buyer states they make and what they can actually prove are two different things. You must be able to demonstrate you earn what you say you earn, 99 percent of lenders are not interested in stated income anymore. So pay stubs and tax returns are key here.

Bonus points: Incomplete applications.

While not turning in the documents your lender requests in a timely manner might not get your loan denied, it can certainly cause you to miss your closing date – so be aware! Get your loan officer the documents they need quickly to ensure a seamless process from contract to close.