The loan approval process can be a haunting experience, full of gremlins and “gotchas” that can pop up and derail your funding without warning.
Many mistakes seem obvious; others, not so much. But they’re real, says Robert Spinosa, senior vice president of guaranteed-rate mortgages in San Anselmo, Calif. “They are coming,” he said. “Again and again.”
San Diego real estate agent Thomas Nelson, who recently posted about it on real estate discussion site ActiveRain, saw “seemingly innocent” goblins sink a deal, delay it, or at least “create major panic” for both buyer and seller.
Spinosa says the lenders have seen them all, and he swears they’re not judging. So if you think something might scare your lender, don’t hide it: let them know as soon as possible so they can find a solution.
Here’s a chilling list, authored by real estate veterans Spinosa and Nelson, of the most common things that happen in the loan process:
▪ Many homebuyers think they are safe once they get approved by their lender. But Spinosa says, “You’re not closed until you’re signed, funded, and the deed is registered with the county.”
After receiving their loan approval letter, some people run out and buy furniture for their new digs, incurring new debt in the process. Other buyers could buy a new car on credit. Nothing wrong with either, but wait for the sale to close.
“Keep an eye on the prize; close first,” Nelson says. Why? Because lenders double-check your application a day or two before closing to make sure nothing in your credit profile has changed. If you’ve opened new accounts, it may lower your credit score enough that the lender decides to charge you a higher rate or you’re too risky a prospect.
▪ For the same reason, don’t change jobs until the dust has settled on your loan. If you stay in the same field, you may be OK, but a lender won’t like drastic changes. Even if you just gave job change notice, “we may have a major problem,” Spinosa says.
▪ When applying for funding, you provided your tax returns for the previous two years. But some people file amended returns. If you did and forgot to mention it (or didn’t provide your Form 1040-X), the lender may have to start all over again.
“You’re not in trouble with us or the IRS,” says Spinosa. “But we have to subscribe to the amended statement.”
▪ This one is for homeowners who are renovating while trying to refinance. “Tell your lender if the house is being worked on or will be when the appraiser arrives,” says Spinosa. Lenders will not fund a loan on a home until all work is completed and confirmed as such by an appraiser.
▪ Generally, it’s not a good idea to co-sign a loan or credit application with anyone, even your offspring. If you do, that loan or card will factor into your all-important debt-to-income ratio. Usually the debt will show up on your credit report, unless it is too recent to have been reported. Either way, let the lender know. Don’t hide it. Otherwise, you could be committing fraud.
▪ Not disclosing ownership of real estate is also a mistake. It will appear in your local property records and underwriters will find it. Even if you own the place free and clear, ownership of other properties is important because you still have to pay property taxes and insurance, and these are part of the lender’s debt calculation.
▪ Here’s one that stumbles many loan seekers: don’t wire unsourced money into your bank account. Lenders like to know where the money for your down payment and closing costs is coming from. If it comes from a loan, even an informal loan from a relative, it counts as a debt. That’s why lenders look at your last two bank statements. They want to make sure the money is there and it meets their guidelines.
“It’s critical that we identify, disclose and document how you plan to complete the transaction,” says Spinosa. There must be a paper trail. If a large sum of money suddenly appears in your account, the lender will want to know where it came from.
▪ Lenders carefully review your credit report, and so should you. But if you find a mistake, don’t dispute it, at least not until your loan is funded. Otherwise, you could have a negative impact on your credit score. If the error is old, for example, disputing it will turn it into a new issue and move it to the top of the list.
▪ The specter of having two mortgages hanging over your head is a daunting proposition for almost anyone. But whether you’re moving or just refinancing, keep making your payments on the old loan until your new one is signed, sealed and delivered. Otherwise, you could show up as delinquent, which would likely derail your new funding.
“When you’re in the loan process, you’re not done until you have the keys in hand,” says Sunosi. “Or, in the case of a refinance, (until) your new loan is funded and registered and the old loan has been officially released.”
▪ It should be obvious: don’t lie on your loan application. Even little ghostly lies will come back to haunt you. When lenders see the same amount being withdrawn from checking or savings accounts month after month, they’ll want to know why.
No worries if the recurring element is discretionary, according to Spinosa. But if it is a bond, it must be included in your debt ratio. If you fail to mention it or insist on “getting it out of my mind,” the lender will wonder what else you’re hiding.
As with all the items mentioned here, talk about it. “The sooner we know, the better,” Spinosa says. “Let us know up front.”
Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications. Readers can contact him at [email protected]