How Not to Get Loan Approval

Here are seven sample scenarios that could make it difficult to obtain financing for a new home...

1. Changing jobs before the loan closes
The underwriter approved your application based on your documented income covering two years or longer, from one source. At closing you must certify that all the information in your application continues to be true, which short of committing perjury you won't be able to do if you switch jobs. Your revised job history will be numbered in days rather than years, which could cause a rejection.

Back in the pre-crisis days, underwriters had discretion to use their judgment in such cases. If the borrower was moving up to a better position in the same field, for example, they would let it go. In today's market, however, underwriter discretion has been markedly reduced, and the likelihood of rejection is uncomfortably high. The prudent thing to do is to defer the job change until after the loan closes. Nobody will care what you do then.

2. Counting future expected rental income as income needed to qualify for the mortgage 
Anticipated rental income cannot be counted as qualifying income unless it is documented in the owner's tax return for at least two years. Further, only income net of expenses would be counted, and that number would be very small or zero if you expense everything you can in order to avoid taxes.

3. Using your income and your spouse's credit to qualify
Good credit without the means to pay is of little value to lenders, and good income without the willingness to pay is not much better. Lenders require both capacity to pay and willingness to pay in the same person.

Before the financial crisis, married couples who had one spouse with the required income and the other with good credit often took "stated income" loans. Stated income was not verified by the lender. These loans were taken in the name of the spouse with good credit, who stated that the income of the other spouse was theirs. But stated-income loans no longer exist.

4. Not understanding what pre-approval means
The main purpose of preapprovals is to establish the bona fides of potential homebuyers to home sellers and their agents, who don't want to waste time dealing with wannabe buyers who can't qualify for a mortgage. With an increasing number of potential homebuyers unable to qualify, the value of reliable preapprovals has increased.

However, the same factors that make it more difficult to qualify for a mortgage today also make preapprovals less reliable. This is especially the case with self-employed buyers, who may be rejected despite having been preapproved. Preapprovals are always subject to conditions, the most important of which is a minimum appraised value. If an appraisal comes in below the minimum, the preapproval dies.

5. Getting financing for a "nonpermanent resident alien"
The terms for this type of buyer is a little stiffer because of the risk that you might be obliged to leave the country. Lenders will require a larger down payment and/or a higher interest rate. In contrast, a "permanent resident alien" suffers no penalty.

6. Not understanding that your student loans can affect your ability to get a loan
If you must begin repaying the debt within the first year of the mortgage, and if the amount is large relative to income this could cause problems with qualifying. If the payments are deferred more than a year, it is a judgment call by the underwriter who will consider the size of the student debt, your credit and perhaps other factors.

7. Divorce decrees and title to your previous home
If you are still on title for your previous loan you are still responsible for it. If you can afford a new mortgage but not two mortgages, your ex-spouse will need to agree to refinance the mortgage in their own name to remove your name from the current deed. Such a provision should have been part of a separation agreement.
The only other possibility is to convince the new lender that the ex-spouse remaining in the house is sufficiently creditworthy that there is negligible risk of your having to meet two payments. That will require documentation that your ex has been making the payments on their own already for at least a year.

Source:  Jack Guttentag at Inman News®