4 Mistakes That Could Delay Lender Approval
Shameka Britton, REALTOR®
It’s no secret that buying a home can be a complicated process. Unfortunately, many first-time buyers make costly mistakes in the loan process that delay or even torpedo their loan approval. Here are four of the most common mistakes to avoid if you want to make your mortgage process as smooth as possible.
1. Not including all relevant information in your financial profile.
One mistake that many first-time homebuyers make is failing to include all relevant information in their financial profile. Lenders will want to see a complete picture of your finances, including your income, debts, and assets. Leaving out any key information could lead to a delay in your loan approval.
It’s important to be completely honest with your lender about your financial situation. Lenders need to know everything to make an informed decision about whether or not to approve your loan. If you’re not truthful, you could end up being denied the loan.
2. Assuming pre-approval is equal to actual approval.
The second mistake that could delay a first-time homebuyer’s loan approval or even cause a denial is assuming that the pre-approval is final. The pre-approval for a mortgage means that you talked to a potential lender or maybe even provided some documentation that gave the impression that you will be approved for a certain amount. Don’t be confused – this is not an actual approval. To obtain the final loan approval, your file will be reviewed by an Underwriter. When you are “underwriting approved” you will be able to get final loan approval.
Here are a few items that the underwriter will review.
If any of these items are not in order, it could result in a delay in your loan approval.
- Employment History: First-time homebuyers may not have a long employment history to show. Lenders like to see at least 2 years of consistent employment. If you have had any gaps in employment, be prepared to explain them.
- Income: Be prepared to provide your most recent pay stubs and/or tax returns. The underwriter will want to verify that your income is sufficient to cover the new mortgage payment.
- Assets: You will need to provide bank statements for the past few months to verify that you have the funds necessary for the down payment and closing costs. The underwriter will also look at your debt-to-income ratio to determine if you can afford the new mortgage payment.
- Credit Score: Your credit score is one of the most important factors in determining whether or not you will be approved for a loan. Avoid making any major purchases and/or obtaining any new credit lines during this process.
3. Not providing all the required documentation.
Another mistake that could delay lender approval is not providing all of the required documentation. When you apply for a loan, the lender will request a variety of documents. If you don’t provide all of the requested documentation, the lender won’t be able to approve your loan.
Your lender may request the following documentation:
- W2 forms from the past two years
- Pay stubs from the past month
- Bank statements from the past two months
- A list of all debts and financial obligations
- Proof of income (such as a 1099 form)
- Proof of assets (such 401K)
- A copy of the sales contract for the home you’re buying
In addition to the documentation mentioned above, You will be responsible for ensuring the underwriters knows where funds for the down payment and closing cost are coming from. Do not move money around to different accounts or receive large deposits from friends or family. A good documentation trail helps during the mortgage approval process.
Not only do you need to provide all of the requested documentation. Remember that time is of the essence. To ensure all deadlines are met, provide the requested documentation to the Lender as soon as possible.
4. Not knowing enough about mortgage rates.
Not understanding how interest rates work is the fourth mistake that many first-time homebuyers make. The lender cannot lock your interest rate until you have an accepted offer. Until then, if interest rates increase, it could jeopardize the pre-approval. Let’s discuss why that’s the case. When interest rates climb, the buyer’s borrowing capacity decreases. For example, A buyer pre-approved to purchase a home for $350,000 at a 3% interest rate, could only be approved for $275,000 at 5%. As you can see, that’s a major difference in the approval amount.
First-time homebuyers need to be aware of a few potential mistakes that could delay lender approval. These include: not being honest on the loan application, providing insufficient documentation, not knowing enough about mortgage rates, and making large deposits during the loan process. By avoiding these mistakes, you will be well on your way to successful mortgage approval.