Why Does Mortgage Financing Fall Through?

Mortgage financing, while often appearing straightforward after a pre-approval, is not a guaranteed outcome until all conditions are met and documents are signed. A pre-approval provides an estimate of what a borrower might qualify for, based on preliminary information. However, the journey from pre-approval to final loan approval involves a thorough review process where various factors can emerge, leading to the financing falling through. Understanding these common reasons helps both buyers and sellers navigate the complexities of real estate transactions.

Borrower-Specific Financial Changes

A borrower’s financial situation can shift between initial pre-approval and the final underwriting process, jeopardizing loan approval. Issues arise from changes in employment status, such as job loss, pay reduction, or a career change that alters income stability. Lenders require consistent income history, typically two years of stable employment, and any disruption can raise concerns about the borrower’s ability to make future mortgage payments.

Incurring new debt after pre-approval can lead to financing falling through. Taking on a new car loan, accumulating credit card balances, or taking out additional student loans can increase a borrower’s monthly obligations. This new debt directly impacts the debt-to-income (DTI) ratio, which typically needs to remain below a certain threshold, often around 43-50% for conventional loans. Exceeding this limit signals higher risk, making the loan less likely to be approved.

Unexplained bank deposits or withdrawals can cause delays or denial during underwriting. Lenders verify fund sources, especially for down payments or closing costs, to prevent undisclosed loans or illicit activities. A drop in credit score due to late payments, new inquiries, or opening new accounts can negatively affect creditworthiness and loan terms, or lead to denial. Inaccurate estimates for closing costs or down payment, or using these funds for other purposes, can leave borrowers with insufficient assets to close.

Property Valuation and Condition Issues

Issues related to the property itself can derail mortgage financing. A problem occurs when the property appraisal comes in lower than the agreed-upon purchase price. Lenders only finance based on the appraised value, not the purchase price, creating a financing gap that the buyer must cover or the parties must renegotiate. Without a resolution, the loan cannot proceed.

Problems discovered during home inspection can cause financing to fall through. Structural damage, extensive repairs for critical systems like plumbing or electrical, or safety hazards can make the property unacceptable. Lenders are unwilling to finance properties with substantial risks or costly repairs, as these issues affect the property’s value and the borrower’s ability to maintain it.

Unresolved title issues present a major hurdle to financing. Liens, undisclosed heirs, or boundary disputes can create a clouded title, preventing the lender from securing their interest. Lenders require a clear title to ensure their primary claim on the asset if the borrower defaults. Environmental concerns, such as hazardous materials or proximity to superfund sites, can make a property ineligible for financing or cause a lender to refuse the loan due to potential liabilities and diminished value.

Underwriting and Documentation Discrepancies

The underwriting process verifies loan applications, and discrepancies or incomplete documentation can cause financing to fail. Inconsistencies or errors in the application or supporting documents, such as differing income figures, can trigger red flags. Such discrepancies require clarification and, if unresolvable, can lead to denial.

Inability to verify information, such as employment history, income sources, or asset origin, poses a challenge. Lenders rely on verifiable documentation, including W-2s, tax returns, bank statements, and employment verification, to assess risk. If an underwriter cannot confirm the accuracy of provided information, they cannot proceed with the loan.

Failure to provide required documents in a timely manner can halt financing. Underwriters request additional information, and delays in submission can push past deadlines, potentially terminating the purchase agreement. Undisclosed liabilities or obligations, such as forgotten credit accounts or unrecorded debts, can alter the borrower’s financial profile. These obligations can change the debt-to-income ratio or expose higher risk, leading to denial.