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If you’re smart, you’ll get pre-approved for a mortgage before shopping for a home. Pre-approval, also called credit approval, means that as long as the property meets the lender’s guidelines, you should be able to close. However, some property issues can cancel your mortgage approval.
- Most programs have lists of ineligible property types. Know them before you shop for a home
- Home appraisers must report anything that could compromise the home’s marketability, such as a weird floor plan or zoning issue. And there is always the chance that the value comes in low
- Health and safety problems must be resolved before a home loan can close (including well and septic systems)
- Title issues, HOA problems, and property insurance can create roadblocks
Understand that your lender can approve you as a borrower, but refuse to finance the property you choose. That doesn’t cancel mortgage approval for you, but it does for that property.Verify your new rate (Jan 18th, 2019)
When lenders cancel mortgage approval
You’ve got yourself pre-approved for a loan, you’ve found your perfect property, and the seller accepts your offer. You’ve done everything according to the book. It should all be straightforward from now until closing, right?
Well, yes — almost always. But there are exceptions. Lenders hate to cancel mortgage approval once it’s been given. But sometimes the nature of the home makes that unavoidable.
When the home’s ineligible
Each lender can pick and choose the sorts of properties it’s willing to lend against. But it’s virtually impossible to find mortgages for certain types of home.
Loans backed by the government or Fannie Mae / Freddie Mac require property to comply with a list of eligibility criteria. Here are some from Fannie Mae’s list, which says a home must be:
- Accessed by roads that meet local standards
- Served by utilities that meet community standards
- “Safe, sound, and structurally secure”
- Insurable for flood and property coverage
- Residential in nature
- Suitable for year-round use
Some loans, like FHA’s 203(k) program, allow you to include the cost of bringing the property into compliance in your mortgage. So if you want the property badly enough, a rehab purchase loan might do the trick.
Many manufactured homes are eligible for a mortgage as long as they are classified and taxed as real property.
When the home’s too expensive
The fact that you’re able, ready and willing to pay for a home doesn’t automatically mean it’s worth the price. You may be willing to overpay for a place because it’s next door to your elderly mother. Or perhaps it’s somewhere you’ve always dreamed of owning.
But your lender’s sole interest is the market value of the property. Its appraiser will visit the home and typically value it based on “comps.” Those are actual, recent sale prices of comparable homes in the neighborhood and wider area.
And, if your appraiser says you’re paying too much, your lender will likely insist you renegotiate the price or make a higher down payment. If that proves impossible, it may even cancel mortgage approval altogether.
When the home’s unsafe or has major defects
You already know that most mortgages can only be used for homes that are “safe, sound, and structurally secure.”
There will likely be problems when a home inspector uncovers issues that mean the property fails to meet those standards.
You could ask the seller to fix whatever’s wrong. After all, the property is unlikely to be mortgageable with any mainstream lender. So the next non-cash buyer will probably have the same issue. However, not all owners have the resources to do that.
If you remain very keen on the home, you might be able to renegotiate the price, buy the property with a different loan, fix the issues yourself and then apply for a mortgage. Another way forward might be an FHA 203k rehab mortgage. Those help buyers in these and similar circumstances.
Occasionally, lenders have to cancel mortgage approval because a legal obstacle proves insurmountable. These commonly include:
- Title — The owner doesn’t have the indisputable right to sell the home. Or perhaps the title is “encumbered” by tax liens or legal judgments
- Insurance — Lenders need you to insure your home. But some properties are uninsurable. That happens most often as a result of multiple recent claims, particularly expensive flooding episodes
- HOA issues — Some homeowners associations (HOAs) get themselves into financial trouble or expose members to the danger of huge bills. Lenders might walk away from the riskiest situations
Of course, the vast majority of home sales sail through to closing with few hiccups. But it’s important you’re aware of potential pitfalls.
It’s not you!
Don’t make the mistake of taking any of this personally. In these situations, it really isn’t you.
Of course, you’re entitled to feel disappointed. You’re losing your dream dwelling. But your lender is protecting you as well as itself.
Why would you want your biggest asset to be a property that can’t be mortgaged? How would you sell it? What’s the upside of owning a place that’s unsafe? Or that’s worth less than you paid? Or that makes you liable for huge HOA bills?
It’s often more sensible to feel sorry for the current owner and move on than to fill his shoes yourself.Verify your new rate (Jan 18th, 2019)