It’s a simple fact that not all mortgage applications end with a closed loan and a purchased home. Sometimes this is due to factors outside of the real estate agent’s control, such as a defect that shows up in the home inspection that cannot be fixed and nullifies the offer. However, some snags that cause loans to become suspended are preventable. Strong communication between agents and lenders can reduce the likelihood of borrowers being unable to close on a loan.
Issues that have the potential to derail a mortgage loan usually fall into one of three categories: issues with the collateral property, issues with the loan application documentation, or timing issues. Beginning in January 2014, new mortgage regulations will also present challenges that agents will need to adapt to.

Collateral property issues

Appraisal valuation and inspection findings are the two main reasons a mortgage loan may fail to close relating to collateral property. While the borrower backing out of the deal due to an issue raised in the inspection is rare, it does occur occasionally.

Unfortunately, there’s not much the lender or REALTOR^® can do to salvage the transaction if there is an unfixable problem with the property. “Many times, issues arise from things that could have been disclosed early on, but weren’t,” said Charlie Schmalz, president and CEO of East Wisconsin Savings Bank in Kaukauna, Wis., and past chair of the Wisconsin Bankers Association Mortgage Lending Committee. Schmalz encourages REALTORS^® to ask sellers lots of questions about the property to ensure that everything is disclosed as early as possible in the transaction.

Another potential issue with the property that can sometimes be avoided involves the appraisal process. The residential mortgage loan may fail to close if there is an issue with the appraisal of the property that was to serve as collateral for the pending loan, causing the property to be valued significantly higher or lower than the valuation in the initial offer. Often, difficulties with accurately appraising the value of the property come from a lack of comparable sales, according to Korey Frey, AVP, senior mortgage loan officer with Johnson Bank in Madison, Wis. “When there are not as many comparable sales, it’s more difficult for the appraiser to come up with a valuation,” he explained. 

This appraisal problem, though, is much less likely to occur in popular markets. For example, if a borrower is in the market for a four-bedroom, two-bathroom, single-family home priced between $200,000 and $250,000, there is far less likelihood of appraisal issues due to lack of comparable sales than if the borrower is in the market for a $1.5 million waterfront property. Agents should make sure their clients understand their risk for appraisal problems with the collateral property and caution against adding contingencies to the contract that could cause a delay in closing. 

Application issues

While some loan closings are prevented by issues with the collateral property, more often a loan fails to close due to an issue with the application for financing. “Sometimes the documentation we receive doesn’t match the information the borrower provides at application,” said Frey. “Occasionally we will receive documentation from a borrower that raises additional questions or requires more documentation.” When the numbers on the application do not match the numbers in the actual documentation, the lender then needs to dig deeper into the borrower’s finances in order to verify their ability to repay the loan, sometimes resulting in the loan application being denied.

One common error on mortgage loan applications is the qualifying income a self-employed borrower claims to have. “There are a lot of guidelines around what income we can use to qualify a borrower,” said Frey. For example, stock ownership cannot be counted as income, and there are restrictions on using funds from the self-owned business as a down payment. The income listed on the application should match the amount of income listed on the borrower’s tax return. So, to prevent discrepancies between the loan application and the borrower’s financial documentation, REALTORS^® should educate their clients as to what income and assets they are able to list.

“The key is to help the lender educate the borrower,” said Frey. “Let them know that we’re going to require more documentation than ever before, and more than they expect in most cases.” Ensuring that the borrower understands the required documentation during the loan application process can reduce the possibility of confusion about what numbers should be reported on the application form. “Anything the agent can do to tell the buyer to be as clear and complete with their financial records as possible will be helpful,” said Schmalz. “The lender and agent need to communicate the same message.” Urging clients to obtain a preapproval from a qualified local lender is another good way to prevent application issues with the loan.

Encouraging the buyer to get preapproved early is one of the most effective and proactive steps that a REALTOR^® can take to help the client become a successful borrower. “Obtaining a preapproval from a qualified local lender is more important than ever before,” said Frey. Mortgage lending regulations and guidelines have never been as complex as they are today, and a preapproval can help streamline the process. Schmalz also said obtaining a preapproval is a good idea but emphasized that the lender will still need to verify all of the information. “The preapproval process can be very valuable if it’s done properly,” he said, “but there are some on the market that can be problematic, so we still have to do our own verifying.”

Bad timing

Mortgage loans can also fail to close due to timing issues caused by last-minute changes. Frey described the domino chain that can be started from a seemingly small last-minute alteration: “last-minute changes in the transaction that affect the financing could require the lender to issue new disclosures to the borrower. This would trigger a three-business-day waiting period that could delay the closing,” he said.
If the seller included a contingency in the contract that the loan must close before a certain date, such delays can be very problematic. “Depending on the documentation requirements, some transactions may take longer to process than others,” Frey explained. REALTORS^® should not commit the client to a quicker-than-normal financing contingency before first communicating with the lender to make sure it’s a viable option. 

Another timing issue that can arise is when a borrower does something to alter their financial standing between their initial mortgage application and the closing. During that time frame, REALTORS^® should caution buyers against making large purchases or switching jobs if they can possibly avoid it. “It has become more of an issue in this environment of double- and triple-checking everything prior to closing,” said Schmalz. “It’s always been there, but it’s becoming more of an issue because of all the scrutiny involved today.”

New regulations

“Regulations in and of themselves cannot prevent someone from buying a house, but they certainly can make it more difficult if there are fewer players in the market and it’s more complex,” said Schmalz. The new mortgage regulations from the Consumer Financial Protection Bureau (CFPB) that go into effect in January 2014 will fall into the “make it more difficult” category. Both Schmalz and Frey anticipate increased scrutiny of every application and fewer loan product options for consumers. “The rules will result in more conservative credit decisions made by the lenders,” said Frey. “Lenders will have increased exposure to lawsuits regarding the consumer’s ability to repay, so lenders will err on the side of caution.” 

Particularly, one significant technical change that REALTORS^® should be aware of is the requirement for a second appraisal if a property has been sold within the last six months. “Agents will need to be cognizant of when the home was last sold,” said Schmalz. Discovering the need for a second appraisal shortly before closing could cause a delay that impacts the ability of one of the parties to close. Schmalz also said buyers and REALTORS® alike should anticipate that mortgage loan transactions will take longer, even for well-qualified borrowers. “The process is going to be slower, even if the end result is the same,” he said.

Regardless of what kind of challenge to closing a mortgage loan that REALTORS^® and their clients face, lenders and REALTORS^® must work together to educate consumers. An educated buyer is more likely to choose the right financing product for their individual situation and make wise property decisions, significantly reducing the chances of the transaction failing to close. The partnership and communication between the lender and the agent is the key to success. “The agent’s relationship with the lender is important, because you have to work with a lender you trust,” said Frey. “Communication makes the whole process much smoother.”

Rose Oswald Poels is president and CEO of the Wisconsin Bankers Association. WBA is the state’s largest financial industry trade association, representing nearly 270 commercial banks and savings institutions, their nearly 2,300 branch offices and 23,000 employees.