Minnesota Mortgage Blog - MN Mortgage and Real Estate News

Why loans blow up... and do not close at the last minute!

The purchase agreement has been written and accepted, the buyers and sellers have moving trucks packed and people literally sleeping on couches or even on the floor waiting for a closing date, then everything blows up at the 11^th hour.

Why do these deals blow up like this? How is it possible to have a loan denied at the last minute?

The Loan Officer / Mortgage Consultant 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 glorified in-bound telemarketing clerks. They don't know what they are doing, so their approach is to throw the file against the wall and if it sticks then, great, but if not, oh well...

Knowledgeable and professional Loan Officers will properly "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 literally, the checks are written, and you sign at the closing table.

The word, "loan approval" is used WAY too loosely. Realtor love to demand" a loan "commitment" letter. Many have recieved this document, then expressed with frustration, "but the lender had already issued a loan approval" when the deal falls apart. 

Underwritering will always INITIALLY issue a CONDITIONAL loan approval, subject to all conditions being met. Clean files usually only need a title report, an appraisal, and an acceptable purchase agreement as "conditions".

Typically, underwriting will ask for more than that (more bank statement, pay stubs, proof of all sorts of things). Then, even if a condition is submitted, it may raise more questions and more conditions. If any of these conditions are not met, then the "conditional" approval is not valid.

This explains the vast majority of cases why a lender, or many times the loan officer, may say that the loan is approved, but then later problems arise and the deal is dead.

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 locked interest rate. 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.

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. This is a fairly recent problem.

Overconfidence in lenders. Overconfidence in someone quoting the "lowest rate", be them local or out state. Just because someone has a web site, just because someone quotes you a rate or cost doesn't mean anything.

The big lenders, the small lenders, the bankers, the brokers...  They all screw up. They all make mistakes! Although I must admit, I actually fix more loans started at banks (especially the big banks), than I do with smaller lenders.

My opinion, stop shopping rates and closing costs, and start shopping LOAN OFFICER (NOT Lender). There are good Loan Officers and bad Loan Officers at every single mortgage originating office nationwide. The name of the company is meaningless. The EXPERIENCE OF THE LOAN OFFICER is all that matters.

A great Loan Officer with tons of experience rarely if ever makes a mistake, always have the customers best interest in mind, and give very competitive rates and costs for the individual customers exact situation.

You can have a very experienced person like myself handle your largest financial transaction, or you can have the glorified in-bound telemarketing clerk (oops, I mean Loan Officer).

I know what I would choose!