Texting while driving. Not looking both ways when crossing the street. And Frasier Crane running with scissors. The dangerous things that we shouldn’t do in life are endless. In a similar way, there are things that homebuyers simply cannot do when applying for a mortgage. Many years ago, I sat in on a training session for new real estate agents, & the trainer was doing a great job talking about farming, networking, marketing, and all the things that an agent must do to build their business. She then went into great detail on the mechanics of putting together a good purchase transaction. The “to-do” list was exhaustive, & she focused in on offering a fair price, good negotiation skills, the do’s & don’ts of writing a contract, proper property disclosure & agency disclosure, etc. She spoke of that climactic feeling of finally getting that contract fully executed after all that hard work. She paused & then poignantly added “don’t even think about that commission yet”. The collective jaws of the new agents almost hit the floor. The trainer’s point of course, was that the deal is just starting, & now the mortgage lender was going to get involved. Just like we do with buyers & sellers, the trainer was doing the right thing in setting proper expectations for the agents; it took hard work just to get to the point of a fully executed contract, but the task was not over yet. The mortgage process was just beginning, & unless that process is successful, all the time spent putting that contract together would be wasted.
Skilled agents coach their buyers on what to do (or not do) when traveling through the mortgage process. It is no secret that loan approval standards are quite high right now, & the process is rather intrusive. With proper preparation & know-how, we all arrive at the closing table. Without it, the transaction becomes a nightmare. Many of the things noted below are not new or sophisticated tips. However, buying a home is a busy, emotional time in a person’s life, & sometimes decisions are made in the heat of the moment without considering how the mortgage approval might be impacted. It is worthwhile to re-visit this topic to help set expectations for homebuyers. So here we go with the “don’t do this under any circumstances if you want to close on time” list for buyers:
- Don’t Change or Modify Employment. Not exactly rocket science, but let’s dive deeper. Needless to say, an outright job change can at best, result in a delayed closing, & at worst, cause a loan application to be denied. In almost all cases, lenders will want to see a paycheck history of 30 days. The new job may end up being an acceptable change & is probably a financial improvement, but tacking on 30 days to the closing date probably won’t make a seller happy. Here are some scenarios that can be problematic:
- Changing roles with the same employer. This often comes with a positive change in compensation, so when can this become a problem? For example, a “promotion” might come with a reduced salary, but a very lucrative bonus or commission opportunity. Until bonus or commission income has a two year history (in most cases) lenders cannot consider that part of the income. We now have less “qualifying income” to consider.
- Job changes by a secondary wage earner. In some cases, one spouse earns the majority of the income, & the other spouse might carry a part time job just to supplement savings or for some other goal. In the past, if that income was not needed for loan approval, it was simply disregarded for qualifying purposes. Under the new QM guidance, lenders will be documenting all sources of income. So will that part time job change from Walgreen’s to CVS result in a mortgage denial? Probably not. But the application will be modified to reflect the change, & the lender may need to obtain paycheck documentation for the new job. Another potential delay.
- Steer clear of new credit. It is no secret that taking on new debt can change the amount of a mortgage that one could qualify for. However, even an inquiry into your credit will need to be addressed. The opportunity for this to happen actually increases when one is buying a home. Rarely is it only the home that will be “new”. There’s that new lawn mower, drapes, carpeting, & it is so easy to be lured in to that “10% discount when you apply for credit” that is offered when shopping for those things needed for that new home. A few years back, Fannie Mae embarked on a “Loan Quality Initiative”. In order for lenders to comply with this initiative, lenders will often perform a second credit check shortly before closing to check for new debt, or even inquiries that could lead to new debt. So maybe that homebuyer chose to take advantage of that “10% off” offer, but did not take on any new debt, or possibly paid it off right away. Is this a deal killer? Probably not, but that buyer will need to “prove innocence” & provide documentation to support the fact that they do not have new debt.
- Put the banking activity on hold. So, ABC Bank is offering $100 to open a new account? Sit tight..that offer isn’t going anywhere. Mortgage lenders are VERY cautious when documenting funds for a down payment. Moving money from an old account into a new account will not result in a mortgage decline. But the buyer will be generating a paper trail to “follow the money”. I cannot count the times when a buyer has told me “I packed my printer for the move, so I can’t print out that transaction history”. Time to unpack sir, or make a trip to the bank to get that printout. Everything gets documented in today’s loan applications. On a similar note, be mindful of substantial deposits that are not from payroll. Did the buyer’s grandmother give the buyer $500 cash for being a good grandson? The buyer needs to use that money for gas & groceries, & not deposit it into their bank account, as the mortgage lender will ask for documentation to support the deposit. “Grandma, can you please sign this receipt?”
- Don’t leave important things out of a purchase contract. If a buyer must sell their home in order to buy a new home, put that language in the contract. Sometimes, a buyer will not want to do this for fear of weakening their offer. This is called a “hidden contingency” & is very dangerous territory. In this seller’s market, a buyer might conclude “my current home will sell quickly…I’m not worried”. If a mortgage cannot be approved because a current home sale has fallen through, & there was no sale contingency in the contract, is the earnest money at risk? I’ll leave that one to the attorneys.
- Don’t wait until the last minute to meet with a lender. I cringe when the phone rings & a buyer says “Hi, I’m on my way to look at a home & I might write an offer. Can I get a pre-approval?” This same buyer will pour over Consumer Reports for a month before buying a new TV, but gives little thought for preparing for a mortgage application. The mortgage process is a deep dive these days, & buyers need to prepare!
So we know what not to do. In contrast, we need to ensure buyers do the following:
- Put as much financial activity “on hold” as they can. No job changes, no new bank accounts, no new credit cards, etc.
- Prepare, prepare, prepare. Get with the mortgage lender early on in the process & have your financial documents in order. Be an open book about what is going on financially. I understand that this is as much fun as a trip to the dentist. Much like a trip to the dentist though, it’s got to be done, & the buyer will be healthier & happier because of it. This is the most important step that a buyer can do this to ensure a smooth transaction.
When a homebuyer is successful with the above items, the process truly does work well, & everyone leaves the closing table on time & happy. 2014 is shaping up to be a very good year for home purchases with a much more balanced market than 2013. Please share this post with homebuyers. Together we can work towards more successful & “drama free” real estate transactions. Happy selling!
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