Mortgage Mistakes Fannie Mae Flagged Most in 2025 - And How Borrowers & Lenders Can Avoid Them

As we step into 2026, it's worth reflecting on the mortgage industry's challenges from the previous year. Fannie Mae continued to highlight key areas where loan originations fell short in their post-purchase reviews. Drawing from their "Quality Insider" publications and announcements throughout 2025, the top defects remained largely consistent, with a strong emphasis on undisclosed liabilities, income miscalculations, and property-related issues. These trends not only underscore the complexities of modern lending but also offer valuable lessons for improving processes moving forward.

Let’s break down the most prominent loan defects identified in Q4 2025 (which mirrored patterns seen all year), explain why they matter, and share tips on how to avoid them. Whether you're a lender aiming for smoother approvals or a borrower preparing for a home purchase, understanding these pitfalls can make all the difference.

1. Undisclosed Liabilities: A Persistent Top Offender

Year after year, undisclosed liabilities top Fannie Mae's list of significant defects—and 2025 was no exception. This issue arises when lenders overlook non-mortgage debts, such as credit card balances, personal loans, or even child support obligations. These hidden liabilities can dramatically inflate a borrower's debt-to-income (DTI) ratio, potentially disqualifying them from the loan or leading to post-closing scrutiny.

Why it happens: In the rush of underwriting, not all debts are caught during credit checks or borrower disclosures. Borrowers might forget to mention them, or lenders might not dig deep enough into financial histories.

Impact: A skewed DTI can result in loan repurchases or indemnifications, costing lenders time and money. For borrowers, it means potential denials or higher interest rates.

Prevention tips:

· Always run a fresh credit report close to closing.

· Encourage borrowers to provide a comprehensive list of all financial obligations early in the process.

· Use automated tools to cross-verify debts against public records.

2. Occupancy Misrepresentation: A Rising Fraud Concern in 2025

One of the most significant and frequently cited defects throughout 2025 was misrepresentation of primary occupancy, often ranking as the #1 initial significant defect in Fannie Mae's random sample reviews (e.g., for Q1 2025). This occurs when borrowers

claim a property will be their primary residence (which qualifies for better terms like higher LTV ratios and lower rates) but actually intend it as a second home or investment property—or vice versa in "reverse occupancy" schemes.

Why it happens: The incentives are clear: misrepresenting occupancy allows borrowers to access more favorable pricing. Red flags include inconsistent insurance policies (e.g., rental coverage on a claimed primary residence), unrealistic commuting distances, appraisal notes indicating tenants/vacancy, or borrowers with multiple properties and undisclosed mortgages.

Impact: This misrepresentation alters the loan's risk profile, often leading to repurchases, penalties, or ineligibility. It's considered fraud, and while most cases result in financial remedies rather than criminal charges, it erodes trust and increases costs across the industry.

Prevention tips:

· Conduct thorough occupancy assessments in all QC reviews (expanded requirements in 2025 updates).

· Review insurance policies, credit reports, tax transcripts (e.g., Schedule E for rentals), and affidavits for consistency.

· Investigate red flags like PO box addresses, gift funds with investment profiles, or properties in vacation areas.

· Reverify occupancy close to closing and train teams on evolving fraud trends—Fannie Mae provides detailed red-flag checklists in their Quality Insider publications.

3. Income Calculation Errors: Tackling Complexity Head-On

Complex income scenarios, especially for self-employed individuals or those with rental properties, were a major pain point in 2025. Fannie Mae repeatedly flagged errors in calculating qualifying income, which can lead to over- or under-estimating a borrower's ability to repay.

Key challenges: Self-employment income often involves fluctuating earnings, deductions, and business expenses, while rental income requires accurate vacancy adjustments and expense verifications. Missteps here can invalidate the entire underwriting decision.

Fannie Mae's advice: They strongly recommend using their Income Calculator tool, which standardizes these computations and reduces human error.

Impact: Incorrect income assessments can lead to defaults down the line or force lenders to buy back loans.

Prevention tips:

· Train underwriters on Fannie Mae's specific guidelines for variable income sources.

· Leverage their Income Calculators for every applicable loan.

· Double-check tax returns and profit/loss statements for consistency.

4. Property and Collateral Issues: Beyond the Surface

Appraisal and property condition defects rounded out the top concerns, with Fannie Mae noting problems that could affect a home's value or habitability. These aren't just cosmetic—they're structural red flags that lenders must address.

Common defects include:

· Water intrusion or mold, which can compromise indoor air quality and lead to health issues.

· Roof damage or leaks, signaling potential for costly repairs.

· Foundation cracks or settlement, which might indicate unstable ground or poor construction.

· Termite or pest damage affecting structural components, often hidden until a thorough inspection.

Why it happens: Appraisals might miss these during virtual assessments, or lenders could overlook inspection reports.

Impact: Defective collateral increases foreclosure risks and devalues the loan portfolio.

Prevention tips:

· Insist on comprehensive home inspections, including pest and structural evaluations.

· Use certified appraisers familiar with local building codes.

· Follow up on any flagged issues with repairs and re-appraisals before closing.

5. Employment Verification Issues: Timing is Everything

A notable trend in 2025 was the "Borrower Not Employed at Closing" defect. This often stems from loans not closing by the Desktop Underwriter (DU) "Close-by Date," which invalidates the initial employment validation.

Why it happens: Delays in processing can push closings past verification windows, especially in volatile job markets.

Impact: It questions the borrower's financial stability, leading to potential loan denials or repurchases.

Prevention tips:

· Monitor DU expiration dates closely and expedite closings.

· Re-verify employment within 10 days of closing for all loans.

· Communicate timeline expectations clearly with borrowers.

6. Inadequate Documentation: The Overlooked Foundation

Finally, Fannie Mae called out general lapses in lenders' quality control processes. A common issue? Not providing the full suite of income documentation to QC teams for review, which hampers thorough audits.

Why it happens: Rushed workflows or siloed teams can lead to incomplete handoffs.

Impact: Weak QC erodes trust in the lending process and invites regulatory scrutiny.

Prevention tips:

· Implement standardized checklists for all documentation transfers.

· Conduct regular internal audits to ensure compliance.

· Invest in QC software that tracks and flags missing elements.

Wrapping Up: Lessons from 2025 for a Stronger 2026

Fannie Mae's 2025 defect trends highlight the need for precision in an increasingly complex mortgage landscape. By focusing on transparency in liabilities, accuracy in income, diligence in property assessments, timely verifications, and robust QC, lenders can minimize risks and deliver better outcomes for borrowers. As the industry evolves—with potential shifts in interest rates and regulations—staying proactive will be key.