Agents, stop letting your deals die. Stop giving up so easily. Deals go sideways for many reasons, so there are many solutions to solving these issues. Use this guide to get your transactions back to the closing table and don’t give up.
What do you do when your buyer’s financing is denied? Whether it’s your buyer or the buyer on your listing, there are solutions you can turn to. If it hasn’t happened to you yet, put these tips in your tool box for a rainy day.
We have closed thousands of transactions over the lifespan of our real estate careers, and we have coached thousands of clients to meet or exceed their goals.
The following tips are tried and true solutions to financing issues! We have used all of these solutions and have coached clients to successfully do the same.
The secret is to manage your mindset. Get off the panic button and get 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 problems do have a solution!
If your sellers have a backup offer, evaluate all the facts before you switch to accepting that deal. If there is no backup offer, request a 2-week extension so you have time to resolve the issues. You can still get to the closing table.
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 at least tell the buyer.
1. Down payment issues or closing cost issues
There are a few questions to ask right away. If the buyer does not have enough money, then how much does the lender require? Would changing the loan program change the requirement? And, is it possible to use gift funds to make up the difference?
Sometimes, borrowers can cash out an investment account, 401k or another account to build up their downpayment. Or, they could get a co-signer and solve the problem. Attempt to fix the down payment issues with any or all of these solutions, don’t just give up.
Other down payment issues can arise because they’re guaranteeing an appraisal gap, so an agent could try to have the seller re-negotiate. The seller could also 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.
If there are still issues with the down payment or closing costs, consider raising the price by the deficit, as long as the property would still appraise. You could also ask the seller to contribute the overage to the buyer’s closing costs, thus giving the buyer more for their down payment. The seller would net the same because the purchase price was raised.
2. Ratio issues
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 their gross income, which equals the debt-to-income ratio.
Housing-related expenses divided by gross income is an indicator of how much of someone’s income they’re spending on their mortgage or rental payment. Typically, the total debt-to-income ratio should be 36% or less. The total housing expense should be 28% or less.
If the 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.
A buyer can easily fall into trouble with their debt-to-income ratio because:
- prices have gone up
- ratio requirements haven’t changed
- higher interest rates make for even higher payments.
How to fix high ratios? Agents and buyers should ask the lender if the following solutions could remedy the problem.
The buyer could pay off a credit card / student loan / car loan / etc. Find out if the loan has to be paid off or just paid down.
Ask the lender if a different loan product would require a different ratio? Or, if raising the downpayment could fix the ratio issue? If so, by how much?
The buyer could also look into a co-signer to fix the problem.
3. Credit score issues
Deal-killing credit issues come in two forms: low scores or a specifically damaging item like a tax lien or a recent default. Find out which one you are dealing with.
If the buyer’s score is too low — by about 15 points or less — it is probably fixable with a few easy remedies. Ask the buyers to use Experian.com to update their credit and correct errors. They can use Experian Boost to improve scores. If the buyer can make a score of 698 into a 715, you might be back in luck with the loan.
If the buyer’s credit 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, then refer to the same strategies as we discussed in our previous point. Find out what needs to be paid off and create a strategy for how the buyer can pay it off.
4. Home sale of the buyer tanked and now they can’t close on their new house
When a buyer’s contingency falls through, accept a backup offer if you have one and they qualify.
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 approach is similar to a ‘first right of refusal’ which keeps the original buyer but gives the seller the right to accept someone who can close faster.
Refer to these four strategies whenever a buyer’s financing is in flux. There is likely a solution hiding just beneath the surface.
Tim and Julie Harris host the nation’s #1 podcast for real estate professionals. https:// timandjulieharris.com/category/podcast has new podcasts every day. Tim and Julie have been real estate coaches for more than two decades, coaching the top agents in the country through different types of markets. https://PremierCoaching.com to get started for FREE today.