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Closing on a home can be an exciting yet stressful time for buyers. As the big day approaches, it’s normal to have some anxiety about whether everything will go smoothly. One of the main things homebuyers wonder about is what exactly mortgage lenders look at in those final weeks leading up to closing.
I want to provide a thorough overview of what lenders check before closing so you know what to expect during the underwriting process. Read on for details on the key items lenders verify, why they review these points, and tips to ensure your loan gets approved.
Income and Employment
One of the most important things lenders check is the borrower’s income and employment status They want to confirm you have stable income to afford the monthly mortgage payment
Here are some key ways lenders verify income
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Requesting pay stubs – Expect lenders to ask for your most recent pay stub They check your year-to-date earnings to calculate your average monthly income
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Verifying employment – Lenders speak directly with your employer to confirm you are still actively working there. They verify your position, salary, and how long you’ve worked there.
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Checking additional income sources – If you have other income like child support, disability payments, or rental income, lenders ensure these additional funds are likely to continue.
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Reviewing tax returns – Lenders may request W-2s and your most recent tax returns to confirm your income history.
It’s crucial not to change jobs or salary before closing, as this could raise red flags and delay approval.
Assets and Reserves
Lenders also verify you have enough money to cover the down payment, closing costs, and required cash reserves. Here’s what they review:
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Down payment funds – You must show the down payment money sitting in your account via a recent bank statement. Lenders want to see you have the funds ready, and that the amount matches what you initially stated.
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Closing cost funds – Closing costs may range from 2-5% of the total loan amount. Lenders check you have these funds available.
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Cash reserves – Many lenders require reserves equal to 2-6 months of mortgage payments. They review your bank accounts to see your present cash assets.
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Large deposits – If you have any recent large or irregular deposits, expect lenders to ask for evidence showing where the money came from.
Credit Report and Score
Lenders always check your credit right before closing. They pull your credit report and review your scores from all three bureaus – Experian, Equifax, and TransUnion.
There are a few key things lenders look for:
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Minimum credit score – Most lenders require at least a 620 FICO score to qualify for a mortgage. Your scores must be at or above the lender’s minimum.
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Late payments – Having no late payments in the last 12 months improves your odds of approval. Recent late payments could indicate you may struggle to pay the mortgage.
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Inquiries – Too many new credit inquiries can negatively impact your score. Limit applications for new credit before closing.
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Balances – Lenders look at your credit utilization ratio (balances divided by limits). Keep balances low on revolving accounts.
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New accounts – Opening a lot of new accounts right before closing can seem risky and delay approval.
Debt-to-Income Ratio
Lenders calculate your debt-to-income ratio (DTI) to check if your total monthly debt is affordable. They look at:
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Total monthly debt payments – Your minimum payments on all installment loans, credit cards, child support, etc.
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Proposed mortgage payment – Principal, interest, taxes, and insurance (PITI).
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Gross monthly income – Your pre-tax monthly income.
Your front-end DTI uses just the proposed mortgage payment, while your back-end DTI includes all monthly debt payments. Many lenders want your DTI to be below 50%. A lower DTI percentage can improve your odds of approval.
Home Appraisal
Lenders order a home appraisal to confirm the property is worth at least the purchase price. If the appraisal value comes in much lower, this could put your approval at risk unless you renegotiate the price.
Key points on the appraisal:
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Home condition – Appraisers note any necessary repairs. Major issues could lead to appraisal problems.
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Comparable sales – Appraisers research similar homes recently sold nearby. Your home must appraise close to those comparable sales prices.
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Appraisal vs. purchase price – If the appraisal value is lower than what you offered, be prepared to discuss options with your lender and negotiate with the sellers.
Documentation and Red Flags
In the final weeks before closing, lenders also review all documentation you submitted – bank statements, tax returns, etc. – with a fine tooth comb. They check for any inconsistencies or red flags.
Watch out for these documentation issues:
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Income documentation doesn’t match – For instance, your bank statements show less deposits than claimed income.
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Information is inconsistent – Different salary numbers reported on your application vs pay stubs.
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Funds aren’t properly sourced – Large deposits without evidence showing where the money came from.
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Appraisal problems – Home doesn’t appraise for the purchase price.
Take time to ensure all your documentation is accurate and consistent across the board. Thoroughly gather and review your documents before sending them to underwriting. This helps avoid problems or surprises.
Tips for a Smooth Mortgage Approval
Here are some key tips to help your loan sail through underwriting:
- Maintain employment and income until after closing.
- Keep credit card balances low and avoid new accounts.
- Save closing cost and reserve funds in your bank account.
- Don’t make any big purchases like a car before closing.
- Review all documentation carefully before sending to lender.
- Be prepared to explain large deposits or credit inquiries.
- Get any home repairs completed quickly after inspection.
- Be ready to negotiate if home appraises low.
Following these best practices will help ensure you don’t hit any roadblocks on the path to closing.
Now that you know what lenders check before closing, you can feel confident and prepared as your loan heads into the home stretch of the underwriting process. Just continue paying your bills on time, limiting debts, and saving your funds. With a little diligence in the final weeks, you’ll soon be holding the keys to your new home!
6 common mistakes that prevent closing on a mortgage
If you’re about to close on a house, you might’ve heard that you should limit your spending and avoid buying expensive items. But what is considered a big purchase during underwriting? A new car or boat would certainly raise red flags with lenders. Even furniture or appliances — basically anything you might pay for in installments — is best to delay until after you finalize your mortgage.
Depending on your credit score and history, these transactions can lower your score, which can impact the interest rate and loan amount you receive. This could result in a higher interest rate for the next 15 or 30 years, or even having to come up with a larger down payment.
Bottom line: Wait to purchase a big-ticket item, because “this can ruin their chances of staying qualified for a loan,” says Patricia Martinez-Alvidrez, senior escrow officer at Clear Title in El Paso, Texas. Lightbulb Icon How soon after closing can I buy furniture?
Once you’ve gone through all the closing day formalities, feel free to pick up that sofa or dining room set you’ve had your eye on.
Taking out a personal loan
If you get a personal loan or co-sign a loan for someone else, you could also face hiccups before closing day. In some cases, the lender might turn you down for a loan altogether, even if you were previously preapproved.
It all depends on how your credit score and debt-to-income (DTI) ratio is impacted. A good DTI, in particular, is a critical factor in mortgage approvals. Lenders consider two types of DTIs:
- Front-end DTI: Your monthly mortgage payment, including principal, interest, taxes, insurance and association fees divided by your monthly income
- Back-end DTI: The sum of all your monthly debt payments divided by your monthly income
Depending on the amount of the loan payment, your back-end DTI could increase to a percentage that the lender is unwilling to accept. If your credit score is right above the minimum to qualify for a mortgage, a hard inquiry from applying for a personal loan could drop it enough to make you ineligible. Either way, there’s a chance you’ll be forced to walk away from the deal.
What do lenders check before closing?
FAQ
What do lenders check right before closing?
Some things a lender checks before closing include your credit score, income and debts. Lenders are primarily looking to ensure nothing has changed since you initially applied for the mortgage.
Do lenders check your bank account before closing?
What happens 3 days before closing?
It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan.
Can a loan be denied right before closing?
Sadly, yes, that can happen. There is often a caveat in the closing docs that if anything has changed to materially impact the risk of the loan between approval or closing, the lender reserves the right to cancel.