It's a real problem
The statistics don't lie. The most recent report by HMDA shows that just under 8% of all loan applications were denied financing. If you add up denials, approved and withdrawn, withdrawn before approved and those loans closed for incompleteness, you get a staggering percentage of 25.01%! Allow me to re-iterate my point. 1 out of ever 4 loan applications die.
By the numbers
From the recent report (just in my metro DC area), there were a total of 57,720 purchase loan applications analyzed. Here were the findings.
1349 (2.33%) were approved but didn't close.
4295 (7.44%) were denied. Note that in order to be an "application denied" the purchase must have had a property address, hence a ratified offer.
7647 were withdrawn. It's been my experience that many of the withdrawn applications are because they couldn't be approved.
1142 were closed for incompleteness. Again, this was a loan that the company probably couldn't figure out and get approved.
That's 14,433 loans = 25.01% of all loans that die. See for yourself.
Using these facts it is impossible to state an exact percentage of loans that don't get done after ratification, but I can extrapolate the data and be pretty accurate. Again I'm looking for denied loans and those borrowers that intentionally pulled from a ratified contract.
So we take only 95% the denials which is (4080) to allow for a small margin of error and add to that a percentage of the others. I'll leave out the approved but didn't close. Add to that 25% of the withdrawn (trust me this is conservative) which is (1911). And let's say that only 5% of the incomplete loans (57) were actually those that pulled intentionally from contract. That's a total of 4080 + 1911 + 57 = 6,048 loans that died after contract ratification. That's 10.48% of all ratified purchases (or) 1 out of every 10!
Don't believe that everything is a denial
It's the oldest trick in the book. Your buyer's loan gets denied and the get their earnest money deposit back right? As mentioned above, what if the loan really isn't a system denial but rather fit in one of the other buckets of loans that didn't get done? The problem is that many times sellers are being forced to give back the EMD (earnest money deposit) when the buyer actually does qualify but doesn't want to move forward. They get cold feet, they find another home... whatever it may be, and they (or the Realtor) asks the loan officer to send a denial letter. Don't shoot the messenger, I'm just stating the facts and any seasoned loan officer in America would corroborate that statement. Look at the numbers for yourself.
What's the solution
First off, make sure the buyer of your home is fully approved. I recently wrote a blog article on the differences between a full pre-approval and a piece of paper saying someone has been "pre-approved". One is gold and the other is 10.4% of the time trash.
Another thing you can do as a seller is require the buyer to be looked at by someone you trust. Years ago I created the Second Look program. The design of the program was to ensure a successful closing by checking out the buyer's financing and for their trouble offer a pretty enticing financing package. This benefits both buyer and seller.
Want to talk?
Do you have a home to sell or are you a Realtor that has had one too many loans fall through? Let's schedule a quick chat and I'll show you a proven technique to significantly limit loan fall out. I would venture to say that many of the buyers that pull out of a contract (you know the ones that weren't really denied) simply didn't have an agreed upon plan moving into the home purchase. They didn't know their numbers and weren't all in. That one right there is a simple problem to fix. I look forward to being of service.