Did you know that according to recent figures from the National Association of Realtors, 1 in 3 buyers have not been closing escrow for the past 5 months in a row (see below)! This is becoming a very concerning statistic for people in the industry, especially when you consider the amount of hours that one puts in on a single transaction. As this is an issue that needs to be addressed, I took some time over the past few weeks to sit down with a few underwriter friends, to pick their brains and find out why so many buyers are not closing escrow. Here are the results!

There are two main reasons for buyers not closing escrow, #1 lenders are denying loan applications, #2 appraisals are not coming in at value to match the negotiated sales price

1. Why are so many loan applications being denied?

According to underwriters, the majority of buyers who are being denied are because, #1, the buyer did not qualify for the loan program or the property their application was submitted under, #2, the documentation sent in on the loan application was not verified properly.

As there are quite a few examples I could elaborate on why the underwriters are denying applications, I will only go through three of these for now. For example, the underwriters mentioned that, 1. “Buyers not being coached properly through escrow“, 2. “FHA buyers purchasing condos”, 3.”Buyers purchasing flipped properties” are three of the main reasons why buyers are having their loan applications declined more than most. So here are some tips to follow that will ensure you do not run into these same problems.

A. Buyers are not being coached properly through escrow

Make sure buyers are aware of a New Rule from Fannie Mae that requires lenders to re-pull a buyers credit report just prior to closing and to look for changes. If the “final” credit report doesn’t match the original credit report, the mortgage may be subject to a complete re-underwrite and, in a worst case scenario, a loan application denial.  Fannie Mae says this ensures loans are priced properly and are funded on the borrower’s credit risk at closing as opposed to at application; because a lot can change while a loan is in-process, especially when the loan is for a purchase closing in 60 days or more.

Some of the things the underwriters are looking for include:

* Did you apply for new credit cards while your loan was in-process?

* Did you run up existing cards while your loan was in-process?

* Did you finance an automobile while your loan was in-process?

* Did you make some other major purchase while your loan was in-process?

* Did you add non-disclosed debts while your loan was in-process?

Each of the above is a red flag to underwriting, so it is important that buyers are aware of this and are being coached properly during escrow in regards to their credit. I have heard some horror stories recently from underwriters who said buyers went out and bought furniture or a new car before closing, and this new debt caused their credit scores to drop which meant they did not qualify for the loan anymore. A golden rule for buyers to follow is, they should NOT purchase anything on credit until AFTER closing!

B. FHA Buyers Purchasing Condos

According to FHA underwriters, the majority of FHA transactions that do NOT close escrow are due to one of the following 4 reasons below. If your client is interested in buying a condo & obtaining FHA financing, try and get the following 4 questions answered upfront to ensure the complex will qualify for FHA financing.

1. Is the complex currently FHA approved? The complex has to be FHA approved, here is a link to check if a complex is FHA approved or not.

2. What are the owner occupied ratios? Remember FHA needs 50% of the units to be Owner occupied!

3. Are there less than 15% of the units in the complex currently delinquent. The FHA requires that no more than 15% of the units can be delinquent in a 30 day period.

4. Is there any current litigation in the complex? The FHA will not allow any financing in a complex that has litigation.

*Here is a Solution. If a particular complex is NOT FHA approved, have the buyer qualify for 5% down conventional financing instead. This is a more cost effective loan option for a buyer, as it eliminates the expensive FHA monthly mortgage insurance, so they will get an even lower monthly payment. Go here for more details on how the 5% down Conventional NO MI program works.

C. Buyers Purchasing Flipped Properties

Another reason why loan applications are being denied is because the property was a “Flip” and did not meet the qualifications for financing. For example, Fannie Mae, the VA and FHA have no problems financing flips even if the seller is making >20% in less than 90 days of resale, but there are Conventional, FHA and VA lenders who will not finance this type of property.

The reason why? Because some lenders have their own “Overlays” or rules that they apply on top of Fannie Mae, FHA and VA flip rules to help limit their loan risk. So it is very important that the right questions are asked upfront to ensure the right lender is chosen upfront, which will meet the specific requirements of the property and the buyer, otherwise the loan will be denied.

Here is a summary of the rules for purchasing flipped properties when obtaining either Conventional, FHA or VA financing  (click here ) New Rules Buyers and Sellers Must Know About Financing Flipped Properties. 

2. Appraisals are Not Coming in at Value?

The #2 reason why 1 in 3 buyers are not closing escrow, is because appraised values are coming in below the negotiated price! We all hear about out-of-area appraisers who don’t know the local market, use of distressed-sale properties to appraise a property that is not being sold under distress, and lack of comparable sales. The key to a good appraisal is using accurate comparable sales to arrive at an appropriate price for the property in question.

New HVCC Rules have Created Problems

We all know that Fannie Mae initiated changes in appraisal guidelines in 2009 with their new appraisal rules under HVCC that prohibit mortgage brokers or agents from selecting the appraiser. However, even though the loan officer can’t have direct contact with the appraiser, a real estate agent can. Here are 4 tips for agents to follow when the appraisal is being done on a transaction, that will help ensure the final appraised value is not left up to chance.

1. Meet the appraiser at the property.

The buyers or sellers real estate agent should always plan to meet the appraiser at the property to offer relevant comparable sales information. Make sure you are the contact to schedule the appraisal and then go meet the appraiser at the property and find out if he knows the area, what data is he using etc, so you can ensure that you are giving every chance for the appraised value to come in at the purchase price.

2. Improvement list provided to appraiser

If improvements have been made to the property, or there are features that don’t meet the eye, a list should be provided to the appraiser so they can include this in their final report.

3. Public records are often wrong

The public record is often wrong, particularly regarding square footage. Any documentation to justify a different number should be made available. According to current appraisal guidelines, square footage added without a building permit usually won’t get credit as usable square feet. This can lower the appraised value.

4. When there aren’t enough comps for past 3 months

When there aren’t comps for the past three months, it’s critical the appraiser is provided with the data upon which to make an accurate evaluation, particularly if the appraiser is unfamiliar with the local market.

*Remember, as appraisers now work for the lenders and have no relationship with any parties on the transaction anymore, unfortunately there will be appraisers that do not care what the final value comes in, as they get paid regardless of the quality of their work! Therefore it is important to do what we can to improve the odds that the final appraised value is not left up to chance.

Doing the necessary homework upfront on transactions is key

It is no secret that lenders are changing their rules all the time these days. In fact, one underwriter told me they had over 100 new rule changes to deal with in the last quarter alone on Fannie, FHA and VA loans. So if a loan officer is not paying very close attention to all of these changes and is not doing thorough homework upfront on the buyers or the property, the buyer can be put into a transaction that will not close escrow.

Myself and my team religiously follow any changes that come from all the lenders, and we always do as much homework as necessary upfront to ensure that any buyer who goes into contract will close escrow. It is why we have been able to consistently fund over 90% of the loans we put into escrow each month for the past few years, the ones we cannot fund are due to appraisals coming in short which we have no control over. If you have any questions or concerns about a buyer or a property, please feel free to contact me directly at 858-200-9602.