Significant Financial Changes Before Loan Closing
July 6, 2015
Consider this true-life situation: a borrower applies for a home loan, gets approved, and schedules a closing date. In the meantime, the lender reviews the borrower’s financial data and notices “significant” overdraft fees associated with a borrower’s checking account. The lender contacts the borrower and requires the applicant to supply an explanation of the situation related to the overdraft fees in writing. Is the borrower’s loan in jeopardy?
The short answer is, it all depends; borrowers are advised not to apply for new lines of credit leading up to a home loan application, they are also urged to maintain a record of steady, on-time payments even after the loan has been approved. Why?
A participating FHA lender is required to document and make loan approval decisions based on any “significant changes” to a borrower’s financial position. A lender who detects things that look like the borrower is running into financial trouble may have an obligation to look into the matter further to insure the borrower is indeed a good credit risk. You can pass the initial credit review with flying colors, but if you don’t maintain the acceptable credit and payment activity that made you a good risk in the first place, the lender could reconsider the decision to approve the loan before it closes.
Your new home loan is a serious financial commitment. Applicants who experience financial changes before the loan has closed may find themselves being asked by the lender to document and explain those changes--in our example above, the overdraft charges are considered serious enough to require an explanation; could they indicate a shift in financial position for the borrower? Maybe, maybe not, depending on circumstances.
And that is a big part of the reason the lender requires a letter of explanation. This is an opportunity for the borrower to explain the circumstances to the lender rather than having a judgment made based simply on the data.
Much depends on circumstances but a borrower should always be careful with credit, checking accounts, and other commitments all the way up to the time of loan closing to avoid the need for a lender’s inquiry.
The short answer is, it all depends; borrowers are advised not to apply for new lines of credit leading up to a home loan application, they are also urged to maintain a record of steady, on-time payments even after the loan has been approved. Why?
A participating FHA lender is required to document and make loan approval decisions based on any “significant changes” to a borrower’s financial position. A lender who detects things that look like the borrower is running into financial trouble may have an obligation to look into the matter further to insure the borrower is indeed a good credit risk. You can pass the initial credit review with flying colors, but if you don’t maintain the acceptable credit and payment activity that made you a good risk in the first place, the lender could reconsider the decision to approve the loan before it closes.
Your new home loan is a serious financial commitment. Applicants who experience financial changes before the loan has closed may find themselves being asked by the lender to document and explain those changes--in our example above, the overdraft charges are considered serious enough to require an explanation; could they indicate a shift in financial position for the borrower? Maybe, maybe not, depending on circumstances.
And that is a big part of the reason the lender requires a letter of explanation. This is an opportunity for the borrower to explain the circumstances to the lender rather than having a judgment made based simply on the data.
Much depends on circumstances but a borrower should always be careful with credit, checking accounts, and other commitments all the way up to the time of loan closing to avoid the need for a lender’s inquiry.
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