In recent years tightening credit requirements have resulted in some not so obvious reasons for home loans being denied.
The purpose of this blog is to help you plan so you can avoid these common pitfalls. As federal regulations have tightened they have resulted in new ways to get your loan denied if you are not careful.
#5 – Old derogatory credit
You have an old collection or charge off that you may have had a disagreement with a creditor about. You dutifully filed a dispute with the credit bureaus and forgot about it. When you started the home loan process suddenly this account comes up to haunt you. See my blog on disputes here. In many cases if you have a derogatory item with a balance over $1,000 and it is in dispute it will halt the loan process until the item is removed from dispute, removed from your credit, settled or paid in full. Some loans such as FHA treat credit disputes differently. Each of these options has pros and cons and if you would like to discuss the best option for you please call my office.
#4 – Large Purchases before Close
This is one of these things that sounds great at the time but can often turn out badly. As you get closer to closing on your home it is tempting to shop for new furniture or cars. I tell my borrowers that window shopping is fine but applying for new credit can cause your loan to be denied. This is because lenders do a credit update up until the day of closing. If new credit accounts are found or balances increased dramatically then your whole loan is pulled from Closing and sent back to underwriting to make sure you are now not over purchasing based on your new credit load.
#3 – Unsourced Cash Deposits
Since Early 2012 all mortgage professionals and even assistants have been responsible for reporting any money laundering activities that is suspected and even if there is a remote chance of it they are held responsible with Jail time if a loan goes bad and they “should” have known. So when you produce bank statements cash deposits > $100 are questioned. The larger the deposit the more questions are asked and the money must be documented to its source. Saying you got $10k from your Late Uncle Joe and having no paper trail will have funds disallowed and possibly your loan denied. Furthermore, on a big cash deposit like that the mortgage company is required by Federal Law to file a suspicious Activity report if you can’t document the source.
#2 – Overtime and 2nd Jobs
In some cases a borrower wants to save up a down payment. They start working overtime to save extra money. No problem there. They save up the down payment, apply for the loan and tell the Loan Officer that “they’ve been getting overtime or working the second job for years”. They want to claim the overtime or 2nd job income to qualify for a larger house. You may want to ask your HR department first to see what information they will be giving out so you won’t get a phone call from your Loan officer stating that your income is too low to qualify for the home you want to purchase.
The Verification of Employment comes back from the employer(s) and it shows that they have been working that overtime or second job for 6 months. The universal rule is that a borrower MUST have a complete 2-year history of receiving the “supplemental” income for it to be considered “stable” and allowable.
#1 – Unreimbursed employee expenses or second business deductions
Everyone should take the tax deductions they are legally entitled to. However some deductions can actually reduce your allowable income when qualifying for a home loan. In comes the IRS form 2106 or Unreimbursed Employee Expenses or in some cases business losses on Schedule C. Depending on the deduction they can reduce your qualifying income. Make sure you tell your Loan Officer when you are applying if this applies to you or it may cost you your dream home.
So with a little preparation and diligence you can prepare for the purchase of your home and your close can go as smooth as possible. In these areas there are many situations and details that would be very lengthy to explore here. So I’d be delighted to go through these and other items to make your home loan process go as smoothly as possible give me a call directly at the number below.
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