Why Real Estate Loans Don’t Get Approved

Suprises and Disasters at Loan Closing…

Last minute loan turn downs are actually a very common problem in the real estate industry. Below are the reasons why this happens in order of the most common occurrence:

1. The Borrower’s income was not qualified properly by loan application taker.

Hourly Income: The main reason for this is primarily figuring a person’s income incorrectly. It is very common to give an applicant too much income and then the underwriter adjusts it.

Generally what happens here is the loan taker is calculating the income of an hourly worker at his or her hourly wage based upon 40 hours a week. For example, if the borrower is earning $52 an hour and working 40 hours a week, that is $2080 a week times 52 weeks, $108,159 a year or $9013.33 a month. Underwriters calculate income monthly. Sounds reasonable correct? Sure it does, but if either the year to date pay stub and/or the W-2 from last year does not consistently support a 40 hour work week, then the underwriter will average the income for the last 2 years, greatly reducing the qualifying income.

Bonus Income Wrongly Calculated: In order for bonuses to be used, they have to have been earned for 2 years for both present and former jobs. Many times, a loan application taker will use current bonus income that does not have a two year history or another problem is that a borrower does have a 2 year history, but on his or her new job, they are not earning bonuses any longer. One cannot be qualified using old income that is not sustainable or likely to continue. That same principle applies to hourly and salaried income also.

Overtime Income Wrongly Calculated: Same problem as bonus income. Overtime has not been consistent for past 2 years even if it has been paid all this year (the underwriter will not use it)

Borrower switched from Hourly work to Commission or became self-employed in the last 2 years: If a borrower switched to commission from salaried work, then the former hourly income will become irrelevant even if it is substantial since the borrower is not earning that wage any longer. Also, the new commission structure must be received for at least one year to be able to be used alone for qualifying purposes. The same above principle applies to self-employed individuals who have switched form salaried in last year. The problem here is that the underwriter will require 1 year’s tax return of switching to self employed and will not use any estimate of income. The reason is that the underwriter needs to see what write offs and expenses the borrower is taking. In rare situations, an underwriter will allow for an audited Profit and Loss from his or her CPA. Unfortunately, even then, an audited profit and loss runs about $1500.

Verification of Employment (VOE) Surprises: In cases where the borrower does not have a 2 year history at the same job or has overtime, commission or bonus income, the underwriter may request a verification of employment from his or her employer(s). There are several sections that if filled in, have the potential to get the loan declined. If the “probability of continued employment section is filled out “no” or “unlikely,” it is almost a certainty your loan will be declined. Unfortunately this happens late in the transaction or worse, the lender or broker missed this before it got to underwriting and it is now being called out. The other section that is crucial is the one that says is “overtime, commission or bonus likely to continue?” If that says no, and your income is dependent on overtime and those forms of income, expect your loan to be declined.

Income Was Just Miscalculated: Your loan agent just calculated your income wrong. How does this happen? Well lets say your ratios are very close, so any miscalculated income could cause your loan to be declined. And let’s say you get paid twice a month and that is not clarified. Twice a week could mean either every other week or on the 1st or 15th. So if your paystub shows $2100 a pay period (for 2 weeks) then if you get paid on the 1st or 15th, then that is 24 pay periods or $50,400 a year. If it is bimonthly, then that is 26 pay periods and that is $54,600 a year. That doesn’t seem like a big difference, but $350 a month difference in income has been enough to decline a loan.

2. Down Payment Can’t be properly Sourced:

All money used for the down payment has be verified as yours for at least 60 days or gifted from a longtime friend or blood relative to you. Large deposits or lump sums have to be sourced to make sure they came from legitimate sources of income. One can not use personal or unsecured loans from friends, banks or family members. Believe it or not, lenders see the balance in your account but miss the fact that there were large deposits that needed to be sourced at the time of the application. Sales of assets such as autos, or any other large asset sale will have to be documented if they paid you in all cash including an appraisal of asset. Many times, these all cash deposits can not be documented properly and the loan gets declined last minute.

3. Un-lendable Property: Loan agent simply didn’t know the collateral rules good enough and collateral was declined in underwriting. There are a number of different property types that don’t qualify for either FHA or conventional lending or the condition of the property is unacceptable to lend on.

Public Safety and Code Violations: The property has building code violations or safety issues that include, unfinished work, missing appliances or fixtures, badly chipped paint, unstable or rotting decks, uplifted concrete, unsafe electrical exposed, unfinished plumbing and substantial dry rot or termite issues. If these problems are not fixed, or projected to be fixed with a rehab loan, then the property can not be financed. Money from the seller can sometimes be held back in escrow and released after funding for repairs, but most lenders and escrow companies do not allow hold backs after close.

Domes: Most lenders do not finance domes.

Manufactured home and stickbuilt property on one lot: Properties with both these structures on one lot are generally not financeable on conventional or FHA loans. In some cases, it can be demonstrated that the manufactured home is used strictly for storage purposes only then financing can proceed, but the property will have to appraise without the manufactured home value.

Manufactured home issues on one lot: All manufactured homes have to be permanently affixed to a HUD approved foundation and have a filed 433-b proving that. Manufactured homes built after October of 1976 do not qualify for financing. Any additions to the property, including decks and dormers attached to the property have to be additionally inspected and approved by a licensed engineer. Manufactured homes generally have to be double-wide or larger. A few lenders will finance single wides, but you will have to shop for it.

Homes with insufficient heat: All homes lacking HVAC (heating and air conditioning) must have 2 sources of heat (woodstove, fireplace and wall heater) to be financeable.

A fix for this is to provide Baseboard heating for two rooms if the property lacks any heat sources. The baseboard heating cannot be plugged into an outlet. It must be directly wired into the electrical system and have a thermostat.

If you have any questions or financing issues contact Ralph Migliozzi 530-330-3073

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