I am sure many of us have seen scenarios where buyers and sellers have moving trucks packed and people literally sleeping on couches or even on the floor waiting for a loan to fund and then for everything to blow up at the last minute?....AAARRGGGGGHHH!!!!
Often times, I have had deals brought to me after being submitted to several other lenders where supposedly either the borrower didn't qualify or something was wrong with the property and, of course, the parties involved didn't find out about the problems until the 11th hour.
One recent instance happened to a buyer whose file was submitted to 8 different lenders and had been denied for one reason or another despite the buyer having near 800 credit scores and very high monthly income. You would think that after going through 8 different lenders that there would be no hope for this transaction. However, I was able to close the deal in a couple of weeks and it took that long mainly because or main processor had just gone on maternity leave and processing was a little short handed at the time.
Why do these deals blow up like this? How is it possible to have a loan denied by many different lenders and then get approved so quickly when the right lender is found?
1. The wild and crazy mortgage market of late. With so many changes in the mortgage market in the past year, many lenders have changed their guidelines because the loans that previously were possible are no longer saleable in the secondary market. Consequently, if investors are unwilling to buy those loans, then banks may not be willing to keep those loans in their portfolio. Thus, the tightening of guidelines. Sometimes, some of these lenders have not been communicating very promptly these changes to the loan officers in the trenches and they don't find out about the changes until the last minute
2. The Mortgage Consultant (or lack thereof). He or she may be quick to assume that the deal meets guidelines and even issues a pre-approval letter and assures the buyer that everything is fine. These types of loan officers are what I call Spaghetti LO's because their approach is to throw the file against the wall and if it sticks then, great, but if not, then too bad.
Knowledgeable and professional Mortgage Consultants will "pre-underwrite" their file upfront before submitting it to underwriting. This means that they will tear a file apart to identify anything that may be a red flag or might be a concern and address it and find a solution so that when the file is submitted to underwriting, he or she is confident that the bases are covered. However, nothing is guaranteed until the funds are sent to escrow (attorney in some states), the funds are distributed, and the transaction recorded at the county.
3. The word, "loan approval" is used too loosely. Many have expressed with frustration, "but the lender had already issued a loan approval." Underwriters will commonly issue a loan approval, but if some requirements are outstanding, then it would be a conditional approval, which means that the loan has been approved subject to conditions being met. One of them is the appraisal. If a problem arises based on the appraisal report, then the approval is not valid. This could explain why in some cases a lender, or many times the loan officer, may say that the loan is approved, but then after the appraisal report comes in, problems arise and the deal is dead.
If an appraisal has not been done or the report has not been submitted to underwriting, then we as Mortgage Consultants should not be telling the parties involved that the loan has received a final approval. We should explain that the approval is conditional and that one of the conditions is that the appraisal report will not show any problems.
4. Misunderstanding of the meaning of a locked loan. Others have expressed, "I thought the loan was locked." The process of locking an interest rate commitment for a certain period and at a particular price is completely independent of underwriting and approving a loan. Having a locked interest rate only insures that if the loan is approved, then it will be delivered using the pricing that appeared on the rate sheet on that day for the period requested (i.e. 30, 45, or 60 days). It is possible to have a locked loan and at the same time have it denied by underwriting. Therefore, if a loan officer promises a buyer that their loan is approved based on a rate lock, then they are either not telling the whole truth or have no knowledge of how the process works.
5. Overconfidence in local lenders. You might think that if a Mortgage Consultant is out of the area or state, then he or she will not be as trustworthy or knowledgeable. Although surely comepetent local lenders exist, a lender being located out of the area doesn't necessarily mean there will be problems since local appraisers and escrow are always used. I have done many loans out of my area and out of state (I can lend in all 50 states) and have not had a problem due to the distance or being out of the area.
Even if a lender were located in the area, he or she still must pick up the phone (or send out e-mail) and coordinate everything. There isn't too much of a difference between doing that in his or her backyard or in another state. If local appraisers and escrow staff are handling the work that absolutely needs to be done locally, everything should work out fine as has been the case when for many of us that have done out of area or out of state deals. If any problems should arise, most of the time they are the types of problems that would have come up even if the lender would have been local. However, sometimes deals have blown up because the local lender did not have the expertise necessary to close the loan.
Of course, this is not an exhaustive list of reasons why deals blow up at the last minute, but they may be some of the most common reasons and factors that come up when it does happen.
Do anyone have any other reasons to add to this list?