How Surprise Undisclosed Debt Can Sink Your Mortgage Application
When applying for a home loan, you’ll need to provide extensive personal, financial and employment information. In this process, many mortgage experts offer the same advice: Be as honest as possible, or it could derail your quest for a home loan.
Failure to disclose your financial obligations — also known as undisclosed debt — could limit the amount of money you qualify to borrow or keep you from qualifying for the most favorable interest rates. In the worst-case scenario, a lender could reject your application.
According to Jennifer Beeston, VP of, mortgage lending at Santa Rosa, Calif.-based Guaranteed Rate Mortgage, the most typical types of undisclosed debt are:
- alimony payments and child support
- credit card debt
- car loans
- past liens or judgments
- tax repayment to the Internal Revenue Service
- and other property loans and payments
How to disclose debt on your mortgage application
From the onset of a mortgage application, you’ll be asked to detail your finances, work history and personal relationships. Lenders use that information to assess your suitability for a loan and what terms they can offer before sending the details to underwriters, who approve or deny the funds. In many instances, you’ll be asked about your income, investments, obligations and debts. When answering these questions, be candid and as detailed as possible.
“Your loan officer is there to help,” said Ralph DiBugnara, president of Edgewater, N.J.-based Home Qualified. “They want to put together the best possible file to present to the underwriter.”
Early on, lenders will run a credit check and ask for a detailed list of personal and financial documents. This is all used to establish your profile, including income and financial reserves, as well as outstanding loans and debts. Loan officers will use this information to make recommendations for mortgage products, including the terms, duration and interest rates.
These documents typically include:
- Last two years’ W-2s
- Last two to three years’ federal tax returns
- 45 days’ worth of pay stubs
- Three most recent bank statements (checking, savings and investment accounts)
- Documents related to other properties and businesses (could include tax returns, mortgage statements, income statements and insurance)
- If you are separated or divorced, provide your loan officer with your separation or divorce decree, as well as details about alimony, child support and any resolution of joint property
In your conversations with your loan adviser or mortgage broker, keep them apprised of any upcoming expenses or debts that could impact your finances. That might include a new car loan, school tuition or anticipated medical expenses. The fewer surprises, the smoother the process will go, Beeston said.
“People get worried and say, ‘If I tell them about a debt, I won’t get the mortgage.’ Our job is to look at everything and help you get a loan,” she said. “But if you steamroll us with bombs in the middle or the end of the process, there’s not much we can do.”
Why you should avoid adding more debt before closing
When loan officers run a credit check, they’ll see many of an applicant’s outstanding debt. To keep informed of your own credit health, potential borrowers can — and should — review their credit reports before applying for a mortgage. These reports offer a fairly comprehensive assessment of any outstanding debt, existing loans and financial blips, such as that bill that went to collections. There might be something on there that you didn’t know about or is there in error, and you may be able to resolve it before you apply for a loan.
It is also wise to review your credit score regularly (your credit score reflects what’s on your credit report, and a sudden score change could indicate something is wrong). You could also sign up for a credit monitoring service, which can alert you if anyone tries to take out a loan or open up a credit card in your name.
If undisclosed debt shows up on the credit report when the lender runs it, that can slow down your process, as lenders need time to work through the issue and determine if it can be resolved.
You want to put best financial foot forward, so it’s smart to avoid taking on more debt when you’re applying for a loan and waiting to close, Beeston said. Along with running your credit at the beginning of the process, lenders will run it again the day before or the day of closing. When they do, they’ll see if you’ve taken on any new significant debts that could affect closing.
Taking on new debt could throw off your debt-to-income ratio, which is the amount of your monthly income that goes to paying off loans and other monthly payment obligations. A DTI of 43 percent or less, including your potential mortgage payment, is ideal.
For instance, “If you add a car loan, it could torpedo your deal,” Beeston said. “I always tell my clients to be conservative until you have the keys for the new house in hand.”
How lenders deal with undisclosed debt
In today’s mortgage industry, lenders dig deep into a client’s history to discern if they are well-qualified for a home loan.
“There’s nothing shady you’re going to get away with in a mortgage application,” said Elysia Stobbe, a Jacksonville, Fla.-based mortgage expert with NFM Lending. “You’re just not.”
With credit checks, lenders will often check multiple name combinations, such as a woman’s maiden and married names, to make sure the credit report is exhaustive, DiBugnara noted. Many debts show up on an initial credit report and loan advisers can quickly bring them to a client’s attention.
Even if debts don’t show up on your credit reports, that doesn’t mean a lender won’t find them. To track down the most accurate information, Beeston said her team uses a three-step process: first they run credit checks, then they verify data by pulling public records and, finally, they pull a second credit report prior to closing. If a client withholds information, eventually, she said, they’ll be caught in the lie. For example, if someone is divorced but says they don’t pay any child support, but claim two kids on their tax return, Beeston will ask for the divorce agreement. Likewise, if they don’t mention a new car on the mortgage application, but an auto loan shows up on the preclosing credit check, that could impact the loan closing.
“People think if they don’t tell us, we won’t find out, but we get a lot of information. We’ll catch it,” she said.
When lenders do uncover debt, they usually bring it to client’s attention and see if there is a workable solution, mortgage experts said. With smaller debts, perhaps under $1,000, that can be resolved quickly, a mortgage application can usually proceed, DiBugnara said. Or, another loan might work.
“We had a client with undisclosed debt and had to tell them they didn’t qualify for the loan they wanted, but we could give them another offer, and the client was thrilled,” Beeston said.
With larger debts, however, DiBugnara said clients will have to put together a plan to pay off outstanding debts before they can qualify for a home loan and close on the property. Ultimately, undisclosed debt may cause one to not qualify or close on their loan.
Of course, there can be instances where a potential borrower is not aware of debt until their loan officer brings it to their attention. Possible scenarios could range from outstanding medical bills that weren’t settled, or a small balance on a car loan or previous mortgage that a borrower thought they’d paid long ago, DiBugnara said.
In one instance, Stobbe recalled a client whose mother added him to the title of her home for tax purposes but didn’t tell her son. As a result, he was responsible for half of the property taxes, which limited his ability to borrow money for his own home loan.
Here again, loan officers say they can often help clients find solutions and resolve their undisclosed debts, or at least help make a plan to address them. It may take a lot of work and slow down the mortgage process, but, in many situations, a mortgage is still within reach.
“There should always be some sort of solution. No one should take the first ‘no’ they get. Always get a second opinion, just like with a doctor,” said Mike Power, branch manager for Schaumburg, Ill.-based BBMC Mortgage.
He suggested borrowers work to resolve their debts and push ahead. “Be persistent, keep your head up and see if there is a way to get into that house.”