7 DON'TS During the Mortgage Process:
How to Keep Your Approval
APPROVED!
By Sam B. Brock NMLS #884442, CCAR REALTOR®/Lender Committee
Congratulations! Your newest clients used your preferred lender, and were quickly approved for the home of their dreams. So quickly, in fact, that it is going to take a couple of weeks before the current owners move out, so we've got some down time. The last couple of weeks before closing can be the most pivotal in the process, so keep these thoughts in mind (and your clients' minds) leading up to signing day.
1. DON'T apply for any new credit.
Yes, homebuyers need to have furniture and appliances in their new home. But, they don't need it right this second on credit because they were offered 20% off at FurniturePalooza Warehouse. They also don't "need" to get in on the "Sign and Drive" promotion at the dealership to put another car in that new, larger garage. Credit will be re-verified at some point before closing, sometimes as late as the morning of the signing. New debt that comes up will, at best, delay your closing. At worst, it will result in denial of the loan application.
Yes, homebuyers need to have furniture and appliances in their new home. But, they don't need it right this second on credit because they were offered 20% off at FurniturePalooza Warehouse. They also don't "need" to get in on the "Sign and Drive" promotion at the dealership to put another car in that new, larger garage. Credit will be re-verified at some point before closing, sometimes as late as the morning of the signing. New debt that comes up will, at best, delay your closing. At worst, it will result in denial of the loan application.
2. DON'T make unexplainable deposits into accounts used for qualifying.
All funds for qualifying and closing must be sourced and seasoned for (generally) at least the last 60 days. Large deposits that the borrower "just had lying around" are a definite red flag. While many programs allow gift funds, there are limitations on each program and required documentation. Have your clients consult their loan officer before depositing any non-payroll funds. Along these same lines, remind your clients that large cash withdrawals can be viewed the same way. Details regarding reserve requirements follow in item #5 below.
All funds for qualifying and closing must be sourced and seasoned for (generally) at least the last 60 days. Large deposits that the borrower "just had lying around" are a definite red flag. While many programs allow gift funds, there are limitations on each program and required documentation. Have your clients consult their loan officer before depositing any non-payroll funds. Along these same lines, remind your clients that large cash withdrawals can be viewed the same way. Details regarding reserve requirements follow in item #5 below.
3. DON'T change jobs.
This includes position changes, industry changes, compensation model changes (i.e., salary to commission), and retirement. Employment is confirmed during underwriting and reconfirmed within 48 hours of closing. If your client is up for a promotion or is changing jobs within his/her company--even if it means a better income--recommend requesting a delay in the official title change with Human Resources, or have him/her consult his/her lender. Most employers want their employees to relish success and enjoy the benefits of their hard work, and will be more than accommodating.
This includes position changes, industry changes, compensation model changes (i.e., salary to commission), and retirement. Employment is confirmed during underwriting and reconfirmed within 48 hours of closing. If your client is up for a promotion or is changing jobs within his/her company--even if it means a better income--recommend requesting a delay in the official title change with Human Resources, or have him/her consult his/her lender. Most employers want their employees to relish success and enjoy the benefits of their hard work, and will be more than accommodating.
4. DON'T consolidate debt or close credit accounts.
Your buyer, with a 661 that barely qualifies for his/her program, wants to change their way of doing things and clean-up some old accounts that they didn't know were still open. Have him/her take care of this after closing. www.MyFICO.com shows the formula used to calculate credit scores as 15% based on age of credit, including oldest, newest, and average age of credit accounts. For some homebuyers, closing a few accounts that they don't use or that they have transferred balances away from could change their score enough to disqualify them before closing. By closing these accounts--even with low limits or secured accounts--Mr. 661 became Mr. 652 the morning of closing, and was either disqualified or had to be restructured, including another ride through underwriting and an extension on your purchase agreement.
Your buyer, with a 661 that barely qualifies for his/her program, wants to change their way of doing things and clean-up some old accounts that they didn't know were still open. Have him/her take care of this after closing. www.MyFICO.com shows the formula used to calculate credit scores as 15% based on age of credit, including oldest, newest, and average age of credit accounts. For some homebuyers, closing a few accounts that they don't use or that they have transferred balances away from could change their score enough to disqualify them before closing. By closing these accounts--even with low limits or secured accounts--Mr. 661 became Mr. 652 the morning of closing, and was either disqualified or had to be restructured, including another ride through underwriting and an extension on your purchase agreement.
5. DON'T pay-off collections/charge-offs.
Just like the effects that closing accounts in good standing can have on credit, paying collection accounts or charge-offs that appear on the credit report can actually decrease a score upon verification. The best general advice is to leave these alone until after closing. If the underwriter is okay with them, your client should be as well, until after the loan has closed. Further, many programs carry "reserve requirements" (additional funds that have proven the borrower's ability to save). If the borrower dips into these funds to pay a collection--even though he/she still has plenty of cash to meet the down payment or closing requirements--it can result in the same delays and turmoil as other credit issues. Always have your buyer consult his/her loan officer before making any such payments.
Just like the effects that closing accounts in good standing can have on credit, paying collection accounts or charge-offs that appear on the credit report can actually decrease a score upon verification. The best general advice is to leave these alone until after closing. If the underwriter is okay with them, your client should be as well, until after the loan has closed. Further, many programs carry "reserve requirements" (additional funds that have proven the borrower's ability to save). If the borrower dips into these funds to pay a collection--even though he/she still has plenty of cash to meet the down payment or closing requirements--it can result in the same delays and turmoil as other credit issues. Always have your buyer consult his/her loan officer before making any such payments.
6. DON'T "skip" or "push the date" on other current monthly payments.
There is a theory amongst the public, some REALTORS®, and some loan officers, that in order to have extra cash available at closing, you can push the date on some of your monthly obligations, or even skip payments, since it won't be reflected on the credit report (in theory) for at least 30 days. This is generally poor advice. Remember that the underwriter has viewed and scrutinized monthly checking and savings account statements, and from the credit report, knows the amounts and due dates of the client's other obligations. It is not unheard of for an underwriter to account for all other monthly obligations when calculating the minimum amount of funds required to be shown in the account at closing.
There is a theory amongst the public, some REALTORS®, and some loan officers, that in order to have extra cash available at closing, you can push the date on some of your monthly obligations, or even skip payments, since it won't be reflected on the credit report (in theory) for at least 30 days. This is generally poor advice. Remember that the underwriter has viewed and scrutinized monthly checking and savings account statements, and from the credit report, knows the amounts and due dates of the client's other obligations. It is not unheard of for an underwriter to account for all other monthly obligations when calculating the minimum amount of funds required to be shown in the account at closing.
7. DON'T make loans to others/co-sign on student loans, car loans, credit cards, etc.
While everyone wants to see their children or other loved ones succeed and have opportunities to better themselves, there is a time and place for everything. Even if your buyer is 100% sure he/she won't ever have to make a payment for the loved one for whom he/she is co-signing, upon verification, that obligation will be included in the debt-to-income ratio, and can have the same detrimental effect on the loan approval. Again, have your client consult his/her lender or advise them to wait until after closing.
While everyone wants to see their children or other loved ones succeed and have opportunities to better themselves, there is a time and place for everything. Even if your buyer is 100% sure he/she won't ever have to make a payment for the loved one for whom he/she is co-signing, upon verification, that obligation will be included in the debt-to-income ratio, and can have the same detrimental effect on the loan approval. Again, have your client consult his/her lender or advise them to wait until after closing.
The best advice when asked by your client whether or not he/she can or cannot, should or should not, might or might not, or ought or ought not do anything with his/her funds, credit, or other assets and liabilities during the mortgage process is to have them consult their loan officer or lender representative. Because of privacy laws, we (members of the lending community) are not always able to share with you, the agent, all of the particulars about the borrower's situation. Credit scores, income, debt ratios, and asset account information are privileged information that the borrower can decide to share with you or not. Modifications to this information can make or break your deal, so always err on the side of caution by following the recommendations above and consulting the lender with any questions.
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