Mortgages are complex, time-consuming, and full of risk. For the consumer, buying a home is likely the most expensive investment they will ever make, and at least on paper, it’s a decades-long commitment that requires consistent financial and physical upkeep. For lenders, providing a mortgage relies on trusting that the consumer will be able to repay month after month for as long as they service the loan. And for both the consumer and the lender, they need to trust that third party professionals will dot all the i’s and cross all the t’s to minimize the risk for all involved. But sometimes, mortgages fall through before they even begin, and by some estimates, lenders spend up to half the time they commit to originations on mortgages that don’t close. Below is a list of common problems that can cause a loan to fail.
For consumers, an appraisal confirms that they are getting a home at fair market value, but a low appraisal may not be considered a deal breaker if their heart is set on that particular home. For lenders, however, the appraisal tells them that the value of the asset that secures the loan is sufficient to cover them in the case they need to foreclose on the property. A low appraisal is a big problem for a lender and may cause them to back out of issuing the mortgage.
Before a seller accepts an offer on a home, they usually want to see that the buyer is pre-approved by a lender for at least the amount the home is being sold for. If the buyer lied or made a mistake on their pre-approval application, or if they change the source of the money they will use for the down payment, the lender would be justified not to provide the mortgage loan.
Because a significant amount of time passes between a loan application and closing on a home, most lenders will run a credit check at the start and near the end of the process. If a consumer opens new credit accounts, closes existing credit accounts, or increases their credit utilization during this time, it may impact their credit score to the point where they no longer meet the lender’s minimum credit requirements.
In order for a resale transaction to proceed, it is necessary to obtain title insurance for the property. A title company will do a title search to ensure that there are no liens or other claims on the title of the property, and if there are, these clouds on the title will have to be cured before closing so that title insurance can be issued.
To protect the underlying security, lenders require homeowners to maintain homeowners insurance for the life of the loan. In high risk areas, such as a flood zone or where severe weather conditions are a consistent threat to the property, or where the property has been the subject of a prior claim for water damage, for example, it may be difficult to obtain insurance.
Errors in documents
Throughout the closing transaction, various documents are gathered and checked to allow the transaction to proceed. If there are errors on any of these documents, the transaction will be delayed, at a minimum, or frustrated in a worst case scenario. For complex transactions, it is important to have experienced loan processors and title agents handle the file, to ensure that all documents are error-free and the transaction can proceed unhindered.
Property fails inspections
When a potential buyer puts an offer on a home, it is likely they have based their decision on the location of the property, the number of bedrooms, the aesthetics of the home, and so on. But nobody wants to buy a home without a professional or two taking a look to see that there are no nasty surprises in store. Most buyers will commission a home inspection and a termite inspection, and do a final walkthrough of the property before closing on the home, and each of these poses a risk to the transaction. The lender is also interested in the results of the home and termite inspections, as they won’t want to lend on a property with issues that could decrease the value of the underlying security for the mortgage.
Seller or buyer backs out
Of course, sometimes the professionals can do everything right, the property can pass all inspections, and the seller or buyer backs out of the sale. Maybe the seller gets a better offer, or the buyer no longer wants to move to the area the property is situated. In this situation, there’s little the lender can do if the main parties to the transaction no longer wish to transact.