Pre-Approved Until Underwriting Said No: What Can Still Go Wrong With Your Mortgage

As agents, we work hard to get a buyer pre-approved, find the right house and get an offer accepted. From there it should be smooth sailing. But then underwriting gets involved. They ask for documents, they want explanations, and every so often a deal that looked solid falls apart close to the finish line.

I've had my share of frustrations with that over the years, so for one of our Tuesday trainings I invited Amber Gowdy, CEO, and Michelle Massucci, COO, of Liberty Home Mortgage in Independence to walk us through what really happens between pre-approval and final approval. Here's what every buyer should know.

Pre-approval and final approval aren't the same thing

A pre-approval means the lender has looked at your credit, income, assets and employment history and believes you can qualify. That's an important first step, but it isn't the finish line.

Once you're under contract, your file goes to a processor, who gathers the paperwork: employment verification, your two most recent months of bank statements, and tax returns if you're self-employed. Then an underwriter reviews everything against the rules for your loan type, FHA guidelines for an FHA loan, or Fannie Mae and Freddie Mac guidelines for a conventional loan. If something is missing or doesn't line up, that's when the extra questions start.

Don't take on new debt until you close

Amber shared a recent example. A buyer had everything in order: strong assets, verified income, smooth sailing. About two weeks before closing, the lender got an alert that the buyer had taken out a new car loan.

On conventional loans, Liberty runs what's called undisclosed debt monitoring, which watches for new debt during the transaction. The new car payment was $800 a month, and adding it to the buyer's debt-to-income ratio blew the numbers apart. Everything had been done right up front. The buyer just didn't realize a new payment could undo it.

As agents, we try to coach clients on this, but we shouldn't assume everyone knows. So here it is plainly: don't open a credit card, finance furniture, co-sign a loan or buy a car until after you close. If you're not sure whether something counts, call your loan officer first.

Protect the money you need to close

The second story was harder to hear. A buyer had about $40,000 in verified funds and only needed roughly $3,000 to close. The lender checked his statements at pre-approval and again during underwriting. Then, days before closing, he said the money was gone.

He had been contacted by a scammer who promised to invest his money. After he sent it, the scammer told him he'd have to deposit even more to get it back. He lost more than $30,000. The closing had to wait until his next pension check arrived so he'd have enough to close.

Keep your closing funds where they are, don't move them without talking to your lender, and be suspicious of anyone who contacts you about investing, wiring or "unlocking" money. Before you wire anything for closing, confirm the instructions by phone with your title company at a number you already know.

Buying a condo? The association has to qualify too

With a condo, the lender reviews the building as well as the buyer. One rule under Fannie Mae's condo project review is that no more than 15% of the units can be 60 days or more behind on their association dues.

Michelle described a deal where everything about the buyer was great, but the association's questionnaire came back at 15.7%. The buyer couldn't move forward until one delinquent owner paid up and brought the building back under the limit. One neighbor's late dues were holding up someone else's purchase.

Give your lender the HOA contact early

Both guests stressed this one for agents and buyers. Get the HOA or management company contact to the lender as early as possible, so they can request the documents they need right away instead of scrambling at the end.

Sometimes there's more than one association. A neighborhood might have a small association for one street or phase and a master association for the whole community, and the lender may need information from both.

Lender "overlays" explain why answers differ

If one lender says no and another says yes, overlays are often the reason. An overlay is a lender's own extra rule on top of the official guideline.

For example, you might hear "you need a 640 credit score for an FHA loan." That isn't the FHA rule. FHA allows 3.5% down with a score of 580 or higher, and 10% down with a score from 500 to 579, according to Experian, though individual lenders can set higher minimums. Liberty told us they don't add overlays, which is one reason agents call them when another lender can't get a deal done.

A short checklist for buyers under contract

• No new credit, loans or big purchases until after closing.
• Don't change jobs without talking to your lender first.
• Leave your closing funds alone, and document any large deposits.
• Answer your lender's requests quickly and completely.
• For condos, get the HOA contact to your lender in the first few days.
• Verify wiring instructions by phone before you send a dollar.

Buying a home this year?

A pre-approval gets you in the game. Final approval gets you the keys. If you're thinking about buying, we'll connect you with a lender who communicates well and help you avoid the surprises that can derail a closing. Schedule a time with me or someone on our team at 21mike.com.

For mortgage questions or financing guidance, get in touch with Amber Gowdy, CEO, at 330-714-0831 or Michelle Massucci, COO, at 440-813-6280 at Liberty Home Mortgage.

Want to see the full session? Watch our Tuesday training with Liberty Home Mortgage.

Mike Ferrante
The Mike Team at LPT Realty
www.21mike.com
Google Business Profile: https://g.page/r/CSQoYzel0Z68EAE
+1 (216) 373-7727