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When lenders get cold feet
Credit is widely available, but banks do delay, even deny, credit in the eleventh hour of financing.
October 18, 2004: 9:39 AM EDT
By Sarah Max, CNN/Money senior writer

SALEM, Ore. (CNN/Money) – In Wagnerian opera, it's not over 'til the fat lady sings. In home buying it's not over until you leave your mortgage closing with house keys in hand.

Loans are delayed and even denied in the eleventh hour of financing for any number of reasons, including overpriced property, income inconsistencies and sudden blemishes on a credit report.

And while credit is still widely available, say mortgage experts, concern that the housing prices have peaked in some markets has made lenders more diligent about making sure all the details on application check out.

Are you paying too much?

Substandard appraisals are one of the primary reasons a loan gets delayed or derailed.

"Lenders are looking at appraisals more closely to make sure there is sufficient equity in the home" when borrowers refinance, said James Mason, a senior mortgage banker with Mortgage IT. "With purchase loans, they are making sure homeowners aren't overpaying for the house."

To check a property's market value, lenders compare a property's selling price with recent sales of similar property, otherwise know as comparables. If a house appraises for less than the selling price, borrowers will need to make up the difference between the sales price and appraised value or renegotiate for a lower selling price.

"Before banks wanted to see three comparable sales," said Bob Moulton, president of Americana Mortgage Group. "Now lenders are asking for a fourth and a fifth comparable."

Lenders may also get cold feet if there are problems with the house itself, such as structural issues that don't show up until the inspection or title issues that don't come up until the title report.

"If a house's square footage comes back less than initially thought the loan can be cancelled," said Julie Okamoto, director of processing for HomeLoanCenter.com, though she adds that the most common reason a loan fall through last minute is because buyers simply change their minds.

Do you really make that much?

Before a loan gets final approval, lenders need to confirm that the borrowers are employed where they say they are employed and have saved what they say they have saved.

"One great [last-minute problem] is when the borrower applies for mortgage and changes job in the middle of the application – and they don't tell us," said Moulton. "We have to get a letter of employment or contract or pay stub to prove he's working at new job, and that can delay processing."

Self-employed borrowers may raise red flags, said Mason. "A lot of times self-employed people overstate their income when talking to mortgage consultants," he said. "After underwriters account for their expenses, their adjusted gross income if often far less than they communicated up front. This may not come up until three or four weeks into the loan."

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Last minute changes to credit reports may also jeopardize a loan. "If a bank reruns a credit report and sees a late mortgage payment or any change in the borrowers financial picture, it would be reason for the lender to withdraw the loan," said Mason.

Fortunately, most of these setbacks can be avoided with good-old-fashioned honesty. "It's crucial that the homeowner be up front with lender regarding all aspects of his profile," Mason added.

In other words, you can exaggerate your wealth at cocktail parties or class reunions, but not on your mortgage application.  Top of page

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