Don’t lose your loan!

If you have worked hard to overcome your past credit problems in order to purchase a home it can be a huge relief when you finally receive that pre-approval letter from your mortgage loan officer. A pre-approval is your next big step toward purchasing the home you have been dreaming about, but it is not a golden ticket either.

Once you are pre-approved for a mortgage the next step is generally verification (aka underwriting). You will be required to supply a number of documents to your lender in order to verify your income, employment history, and other information which is relevant to your loan. Assuming that you are able to pass successfully through the verification process your loan status should move from “pre-approved” to “approved.” 

Yet just because a lender has issued you a pre-approval does not mean you are guaranteed financing. There are still a number of ways to mess up your loan before your closing date rolls around. Keep reading for a list of ways to mess up your mortgage approval. Hopefully you will be able to learn from the mistakes of others so that you never have to find yourself in the same unfortunate situation.

Apply for or Open New Accounts

Even though your credit was checked as part of the pre-approval process, your lender is most likely going to check your credit report again prior to closing. They do this in order to be sure you have not experienced a change in “borrower circumstances.” If credit or financial changes occur between pre-approval and closing (such as a drop in your credit scores) then you could lose your loan.

Applying for or especially opening new accounts is one potential way to kill your mortgage before you ever make it to the closing table. When you open a new credit obligation while your mortgage loan is in underwriting, especially a large obligation like an auto loan, you could raise your debt to income ratio as well. An increase in your debt to income ratio could financially disqualify you from closing on your loan even if your credit scores are not an issue.

Run Up Your Credit Card Balances

Another potential way to mess up your mortgage closing is to run up your credit card balances. As is the case with opening new accounts, when you run up higher balances on your credit cards you have the potential to both raise your debt to income and to lower your credit scores simultaneously. You may not realize it, but your credit card balances have a big influence over your credit scores. As your credit card balances climb your credit scores will generally begin to fall – sometimes significantly. In fact, your credit card balances can have a negative impact upon your credit scores even if you keep your accounts paid on time each and every month.

Close a Credit Card Account

When you close a current, positive credit card account that action has the potential to drive your credit scores downward. Closing a credit card does not cause you to lose credit for the age of the account (that is a myth), but a freshly closed account can increase your debt to income ratio. When your debt to income ratio increases, your credit scores will most likely be impacted negatively. If your credit scores fall because of a credit card closure then there is a chance you may no longer qualify for the mortgage you had been approved for previously.

Pay Off a Collection

You would think that paying off old collection accounts is a positive move when it comes to your credit scores. However, due to a deficiency in some of the older FICO credit scoring models which are used by mortgage lenders, paying off an old collection can sometimes be interpreted as new derogatory activity. As a result, there are instances when paying off an old collection account could actually have a negative impact upon your FICO credit scores. Even if that impact is only temporary those newly lowered credit scores could be enough to cheat you out of your home loan.

Of course you should not assume that paying legitimate old collections is necessarily a bad idea. However, if you were already approved for a mortgage with those old collections present on your credit reports then you might want to consider waiting until after your home closing before paying or settling any old accounts.

Make Late Payments

Making late payments on any of your credit obligations while your mortgage is in the underwriting process is a huge mistake, a mistake which could easily put the brakes on your home loan.

A late payment could potentially cost you up to 50 points per credit bureau. At best, your closing date could be pushed, at worst, you no longer qualify for your loan.

Report your gross income, not your net income

While this doesn’t happen often, it does happen. Make sure when you enter your income on the application, you enter your gross income. This will go into the calculation for your debt-to-income ratio and if it isn’t entered correctly will not show the whole picture.

Document all the ways you earn money

Often people just submit a W2 form showing their annual salary, but if your debt-to-income ratio is too high, the lender will have to go back and ask you for more—such as documentation of 401k, IRA, stocks and bonds. Submit everything. More information is better.

Prepare to explain big deposits in your bank account

Banks will scrutinize your checking account history for the past two months. You’ll need to produce a paper trail for any out-of-the-ordinary, large amounts of money deposited into your bank account, such as the check your parents gave you to help with the down payment or the time your boss finally reimbursed you for that business trip. In the latter case, for instance, you might be asked to submit a copy of your expense report and evidence of your credit card payments for the expenses. Many times, a borrower has a very kind and generous family member who is excited to help them get in to a home. This kind hearted person reaches in to the old cigar tin under the mattress and pulls out a couple thousand dollars of cash to give to their favorite loved one

The borrower, all excited about now having the cash to put in the new kitchen or bathroom, puts the money in their account a few days before the closing. As with all loans, the lender will ask for updated assets, or as such bank statements to ensure the borrower has the cash to close. The underwriter will see this large deposit and ask for it to be sourced. Meaning, we have to prove where the money came from. We have to prove this to meet government requirements of insuring that the lender is not funding terrorism or laundering money. All deposits must have a paper trail of their source of origination. A note from Uncle Ernie will not do.

The Takeaway

Just because your 3 credit reports and scores were checked by your lender prior to receiving your initial pre-approval does not guarantee you the money in hand to purchase your home. Yet if you can avoid the 5 mistakes above you should have little to worry about, at least from a credit perspective.

Real Estate: Don’t Keep Losing!

The Most Trying Aspect of Real Estate is now:

Buying a home… or at least, trying to. Fulfillment of the American Dream, due to disappointing lack of inventory, for many consumers stretches into months of losing multiple-bid situations. Hope is not lost but don’t be a lemming of a buyer!

Unfortunately, I am just a simple Realtor‌‌® with some experience in the market, with a team that has a half-decent conceptual understanding of what causes these trends, and how to hopefully mitigate them to net a positive result.

There are a number of variables that affect interest rates and a multitude of factors that drive the housing market. They are reasonably identifiable, occasionally discussed via the news and most of us should be familiar with at least some… They are: money-supply, international borrowing and it’s flux on our bond market, the LIBOR, good jobs reports, consumer confidence, Wall Street behaving itself, and no looming catastrophes on the horizon. All things are coming up roses, right? Righto!

Well then, forgive my consternation, but why?!? are we faced with April 1st inventory of 21 properties in one of Worcester’s strongest SFH price-bands $275,000 to $325,000. That will get you a generally lovely middle-class home in our fair city and give you a good shake at life. But yet there they are… 21 properties currently on the market. Out of those 21 more than a half-dozen just had open houses this weekend, and others had price-drops. Based on past market activity, there should be less than 12 or so houses left in the next week or so in that bracket.

“So what’s the big deal then? What’s going on?” Well, I’ll tell you as best I can.  This situation we find ourselves in is explainable by simple supply & demand economics. The housing market has the ability to vastly imbalance itself over consumer driven engagement, or in this case, disengagement on the part of sellers. New construction is slow to keep pace with buyer demand and in that existing housing stock numbers aren’t bolstering the market.So in essence, what we have is a multitude of latter millennial buyers looking to engage. They have cast-off that old albatross, student loan debt, from their neck. They are promoted, positioned, and eager. Some have earned an advanced degree on the company’s dime, and now occupy a corner office. They are our next 5-7 years of home-buyers and they are savvy, resolute and knocking on the door. Why do we hold them at bay? Because the seller, comfortable in their home, has a different set of circumstances and does not want step out of comfort to enter the buyer-pool and try to find something that meets their needs in an unbalanced market. These are senior (experienced) homeowners and they have seen this before, and they will ride it out until inventory is more balanced.

The Solution:

Most obviously our solution would be to cajole people into listing their houses. We’re all working on that, believe me. That aside, the positioning of yourself as a strong buyer, a real contender, that will win takes multiple-spinning plates in the air and partnering with a highly competent Realtor®. Sadly, some will just not win for a while, due to financing constraints, limited cash-on-hand, marginal credit, or worse than all of the above – their inability to get out of their own way.

The blogs these days tend to talk about “creating the best picture of yourself as a buyer.” I just read one particularly unhelpful article on a colleagues proto-blog titled “Know What You can Spend.” Step back! that is a sparkling bit of wisdom hitherto unheard in our time!
 “No! We are savvy consumers. We know what we can spend, now tell us how to win!”

There are ways to win: however, in their entirety not all will be readily applicable across the board for everyone, nothing ever is.
In no prescribed order:

  • Contingencies – in a normal market you can ask for silly things… here, do not. Just get the house, free of material defects within range of fair market value and be happy.
  • Appraisal – step out on a limb, a well constructed limb, if you have the financial capability. Homebuyers today are waiving a portion of their appraisal contingency, or the entirety of it. For example, house is listed at $399,500 and we know it will go to $420’s… Waive your appraisal contingency to $400,000 (asking price) to give yourself some protection and better yet a competitive edge.
  • Beyond knowing what you can spend, get all your ducks in a row! This means meeting with your relatively LOCAL mortgage-broker (don’t use some big cumbersome bank) and provide everything said broker and underwriters ask for STAT!
  • Terms –  Time is of the essence, particularly in multiple offer situations. The nonsense they’ve been experiencing in Boston for years, where Open Houses turn into 2-3 subtle home-inspections going on at once is migrating toward Worcester. Hit the house at least 2-3x before offers are called for – bring along a plumber, electrician, etc – anyone to look at anything you might have concerns with. In a multiple offer situation there will be very little wiggle-room post-inspection and you’ll need to be sure that you’re buying this house. Inspections should be done in 5-7 days tops, and people love seeing a P&S in 10 days of acceptance.
  • Financing: Did you know that there are lenders that can issue an upfront commitment?  If you get everything into them, ahh…upfront. I have a speedy lender that can provide you a 21 day closing time from acceptance of offer. Thats huge! Talk about a competitive edge up against other buyers that might not even have all their docs into a lender. Yikes to those poor folks you’re up against with that power. Furthermore, back to our old friend Mr. Appraisal. Some lenders now are waiving the need for an appraisal in situations where buyers are putting a large-amount of cash down on the property (in range of 33%-45% or so.)
  • Letters: The sellers while wanting to make a wise and profitable financial are human-beings. I believe in the decency of people despite what we see on TV every day. It’s why they get offended when you send them a litany of crazy requests and fixes. Perhaps not easily as offended, they are susceptible to heartwarming stories. They don’t want to read your bio and how this house “speaks to you.” They want to know if you have a real need for the property, “It’s a ranch, the only ranch in this area, that could be ADA capable and I have a handicapped person living in our home and we *need* this property.” If you have an example that rings true, is provocative or heartwarming send a letter with your agents input. Don’t pull out the trials and tribulations of George Costanza; that will backfire.

All in all, there’s plenty of ebb & flow in our marketplace to win a property. Position yourself the best financially, minimize demands, think outside the box and work with top-notch people that flow organically, in the search process and in a transaction, moving pieces and ensuring you stay ahead of the curve.

Best Wishes for Spring! While you’re out there house-hunting we will be here, cajoling sellers into listing to right-size their living for 2019 so that we may all enjoy a wonderful year.