My clients frequently ask me, “What are the most common challenges that you face during loan underwriting?”
… or simply put, what problems might cause the lender to hold up or deny my loan?
This is an important question, because if you know about the potential pitfalls ahead of time, you may be able to avoid them before applying for your loan.
So in this article, let’s talk about the 5 most common mortgage underwriting challenges you might face, and how you, the consumer, can sidestep them.
Overview of Underwriting Challenges
Every transaction and client is unique. With today’s underwriting, we can see challenges with appraisals, self-employed borrowers, and verification of funds.
Here are 4 common roadblocks we see.
- Low (or No) Down Payment
- What If I’m Self-Employed?
- Poor Credit
- Problems Qualifying with your Current Income
Since I’ve already written about these on my blog, I’ve provided links above so you can read about these issues.
Verification of Buyer Funds – Easier Said than Done!
I would like to take the rest of this article to focus on the most common challenge I’ve experienced lately as a San Diego Mortgage Broker, which is the verification of a buyer’s funds for down payment and the deposits that appear on the client’s statement.
In order to verify that the client has enough funds to close escrow we must submit statements from their accounts. Any “large” deposits must be documented with a paper trail showing where that deposit originated from and its purpose.
I have the word large in quotations because the definition of large is left up to the underwriter’s discretion. A large deposit may be $4,000 or it may be as little as $1,500.
I recently closed a San Diego Home Loan in which the clients made $15,000 a month and the underwriter called a $1,700 deposit large. In my opinion, $1,700 is not a large deposit to someone who is making $15,000 a month. Since we do not know what the underwriter is going to consider large, we must gather documentation for any deposit that we think an underwriter may question. If the deposits are direct deposits from your employer, these will not need to be documented.
Sample Deposit Verification Solved
Let’s look at a recent example from a San Diego Home Loan I just closed for a purchase. I received a bank statement from the buyer that supported the cash needed to close, but the statement showed a number of deposits. One deposit was $55,000. I knew we would need to document this deposit.
When I asked for the documentation, I found that it was a combination of two deposits. One was a $50,000 check from the buyer’s company account that would be used for the down payment and the other was a $5,000 check from a friend. The $5,000 was repayment of a personal loan that the buyer had made to his friend a couple years prior. My processor and I documented the deposits with copies of the cleared checks and a letter of explanation regarding the payback of the personal loan.
Traditionally, we would prefer that deposits of this size be made separate and that any deposit of an unusual nature be mentioned to us as the San Diego Mortgage Broker prior to it being deposited. Unfortunately, this deposit had already been made and due to a short escrow period we could not wait for a new statement excluding the large deposit. Feeling we had documented this deposit properly, we submitted the statement and deposit paper trail to the underwriter.
We received a conditional approval from the underwriter with only one condition. It stated we needed to verify the personal loan by submitting a copy of the check the buyer gave to his friend 2 years earlier. If we could provide that check the loan would be approved and we could get loan documents, if we could not, the loan would be denied.
We were somewhat surprised that we needed to supply proof of the original loan from 2 years earlier, but the real problem became apparent when we learned that the original loan was in cash and we could not document it. This one condition was going to kill the transaction, even though the client did not need this $5,000 to close the transaction.
After a few days of pleading my case with the underwriter to no avail, I was able to contact an underwriting manager who overruled the underwriter and gave me an exception to ignore the $5,000 because it was not needed for the down payment. We were then able to close this San Diego Mortgage.
Here are the key points to this story: Never deposit large sums of cash into your account. Since there is no way to document where these funds came from, it could cause the loan to be denied. If you are going to lend large amounts of money to a friend, document it and do not give it in cash.
These days’ underwriters are being very picky about deposits, so think twice before you cash that check. If you are in the middle of a transaction, talk with your San Diego Mortgage Broker first and if you can’t document where the deposit came from or if it is unusual, do not make the deposit.
If these simple tips are followed your San Diego home loan transaction will go much smoother.
Recommendations to Sidestep a Stressful Application Process
If you are about to start the process of buying a home or refinancing and would like to discuss your scenario, I am happy to answer any questions you may have. Please go to my Contact Page to get in touch with me. If you would like to get a free San Diego mortgage rate quote, click HERE. The best way to avoid any potential problems is to have everything reviewed prior to staring the transaction.