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Realtors: Stop letting your deals die. Stop giving up so easily. Deals go sideways for many reasons, and as such, there are many solutions to solving these issues. Use this guide to get your transactions back to the closing table. Don’t. Give. Up.
Today’s discussion? Financing Denied! We will show you what to do about this, whether it’s your buyer or the buyer on your listing. If it hasn’t happened to you yet, put this in your brain as ‘what I need to know BEFORE I need to know it!’
Rest assured: We have closed thousands of transactions over our real estate career, and have coached thousands of coaching clients to meet or exceed their goals.
The following are tried and true solutions to deals dying due to financing issues! We have done 100% of these solutions, and have coached clients to successfully do the same.
Secret: Manage your mindset. Get off the panic button and into action. If the buyer still wants to buy and the seller wants to sell, you still have a deal. Get to work to solve the problem. Most deals DO have a solution!
Note: If you have a backup offer, be sure you know the facts before you switch to that deal. If you don’t have a backup offer, get a 2-week extension so you have time to resolve the issues and still get to the closing table, then get to work.
Realtors Guide to Saving the Deal: When Financing Is Denied.
(4 Common problems and how to fix them).
Note: Legally, a lender must give the reason a borrower is being denied their loan. Find out the specifics. If the lender won’t tell you, they MUST tell the buyer.
1. Down Payment issue, and/or closing cost issue?
-If it’s not enough, then how much does the lender require?
-Would changing the loan program change the requirement?
-Is it possible to use gift funds to make up the difference?
-Can the borrower cash out an investment account, 401k or other to build up the payment?
-Can the borrower get a co-signer and solve the problem?
-Is it because they’re guaranteeing an appraisal gap? Might the seller renegotiate?
-Seller to provide a second mortgage to create funds? The seller can make interest on this loan, file it as a lien using the title company and require it to be paid off in a certain time frame.
-Can you raise the price by the deficit, and still have the home appraised? Have the seller contribute the overage to the buyer’s closing costs, thus giving them more for their down payment. The seller nets the same because the purchase price was raised.
-Seller to provide seller’s financing or use a hard money lender, then the buyer refinances into a more conventional loan.
2. Ratio issue? What does this even mean? Lenders require specific debt-to-income ratios in order to qualify a borrower for a mortgage loan. They calculate the buyer’s total expenses divided by gross income, which equals a ratio. Housing-related expenses divided by gross income are an indicator of how much of someone’s income they’re spending on their house payment. Typically, the total debt-to-income ratio should be 36% or less, and the total housing expense 28% or less.
If ratios are too high, this means the borrower has too much debt, creating too much cash flow going out the door and not enough toward their mortgage payment.
This has become more problematic because a) prices have gone up, b) ratio requirements haven’t changed, and c) higher rates make for even higher payments.
How to fix high ratios? ASK THE LENDER which of these would work:
-Buyer pays off a credit card, student loan, or their car loan / etc. (Could they borrow from a 401k to do this, or borrow from the bank of Mom and Dad to do this?) Does the loan have to be paid OFF or just paid DOWN?
-Would a different loan product have different ratio requirements?
-Would raising the downpayment fix the ratio issue? How much more down payment?
-What if they got a co-signer?
3. CREDIT SCORE Issue? Again, find out specifically what the issue actually IS. Deal-killing credit issues come in two forms: Low score, and/or a specifically damaging item such as a tax lien or default that’s too recent. Find out what it is.
-If the score is too low by about 15 points or less, it is probably fixable with a few easy remedies. Use Experian.com to update credit and correct errors, and Experian Boost to improve your score with a few simple steps. If you can make a 698 score into a 715, you might be back in luck with the loan.
-If the score is too low for the loan product, the borrower might need to switch to FHA or another, more lenient type of mortgage.
-If something needs to be paid off, use the same strategies as we discussed in our previous point. Find out what needs to be paid off and how the buyer can pay it off. Obviously, the lesser amounts are easier, but there still may be a solution, so don’t give up.
-If the item that needs to be paid off is some sort of lien, like a homeowners association, a mechanic’s lien, or a private loan, it may be possible to negotiate a lower payoff with whoever is owed the debt.
4. Home Sale of the buyer tanked and now they can’t close on their new house. Take your backup offer if you have one and they qualify. (Re-check with the lender since rates went up and their credit may have changed).
-See if the seller will convert the contract to ‘contingent on home sale with an escape clause’. In other words, they can try to sell it to a new buyer who is NOT contingent on a home sale. This is kind of like a ‘first right of refusal’ which keeps the original buyer but gives the seller the right to get someone who can close faster.
-Communicate with the listing agent (if it’s not you) to see if THEY have a backup offer and to strategize. If it’s in your market, maybe YOU have a buyer for the home.
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