REAL ESTATES FINANCING 101
Finding the right home is obviously one major component of homeownership, but that in no way means the process of getting that home is as simple as finding it. The reality is that searching for and buying a home involves an entire process that includes many steps and pieces that need to come together before you can declare the home “yours,” make the move, and settle in.
As a home buyer, you have numerous options when it comes to getting approved for financing for your home purchase. You can apply for loans from any number of national or local lenders. So why should you choose to work with me?
When you finally get to the end of the closing process, and you start picturing yourself moving into and settling into your new home, nothing feels worse than the deal suddenly falling apart at the last moment. While this isn’t common, it still happens. How and why? Some of the reasons include a last-minute home inspection gone awry, a low home appraisal, or failure on the buyer’s end to obtain financing.
However, it’s easy for buyers to avoid these potential pitfalls and ensure the deal goes through if they are aware and prepared, and if they’ve secured the services of a good agent to make sure all the bases are covered so you’re not left in such a disappointing and heartbreaking situation.
First, the home inspection. If major physical damage is revealed during the home inspection, the deal could be called off. This should not be all that surprising, however. If a home is considered structurally unsound or unsafe to live in, then there’s a good chance the deal won’t move forward, and the purchase will fall through.
Low home appraisals also occur, and can be deal breakers, just like a poor home inspection report or damage noticed. If your target home’s appraisal is low, the lender will not give you a home loan to purchase it.
To avoid financing becoming an issue as a last-minute deal breaker, please ensure you have been pre-approved for a mortgage, and for the appropriate amount (if you work with me, I’ll make sure you are). You might be surprised at how many applications are rejected during the mortgage approval process. Wait to get your finances in order before you apply for a loan, and then wait again to be pre-approved before you go off searching for homes, finding the perfect one, making an offer, etc. — only to have the deal go through because you didn’t end up qualifying for the loan after you’ve gotten yourself emotionally invested in a home you can’t have. Going through the entire process and finalizing everything with the seller and listing agent, but then faltering in the financing department, will stall or probably sink the deal, almost every time.
Title insurance and even more home inspections should also be expected as part of the closing process. The lender will have to ensure the seller fully owns the house. Defaulters will not own the house fully.
It’s important that you keep these potential pitfalls in mind before you get to the closing process. If something goes wrong, but appropriate contingencies are in place, the deal could still be saved. But better to be safe than sorry — so protect yourself and take the right steps to get you where you want to
How the Loan Process Works from A to Z
Understanding the loan process from start-to-finish is the best way to ensure smooth sailing and issue-free closing. Knowing what must be done, when it must be done — and subsequently if it was done — is the best defense against lender obstacles and unexpected delays.
The loan process comprises four phases: origination, processing, underwriting, and closing. Most lenders’ loan procedures go through this process or some version of it.
The origination of a loan is pretty straightforward: you decides to enter into a loan agreement with a particular lender. This is the origin of the loan, hence the term origination.
Processing is also just what it sounds like: the loan is processed by the lender. Processing usually includes filling out lots of forms (and I mean lots of forms), answering questions, and providing various documents to the lender.
Underwriting is the step of lending that some people don’t know much about. When a loan goes through underwriting, a specialist compares the processing stage results against the lender’s requirements and standards to decide whether to approve or deny the loan. In other words, underwriting is kind of like the spell-check of the loan process, where someone goes through the materials with a fine-toothed comb to make sure everything is on the level. We’ll go more in-depth with underwriting later on in this book.
Finally, we come to closing, where the loan is completed and funds are transferred to the agreed recipient.
Almost all commercial loans go through this process, whether its mortgages, auto loans, or small business loans. After all, you don’t just walk into a bank, mortgage company, or mortgage broker and say, “I want a loan,” and immediately turn to closing.
To the uninitiated, lending seems to be complex. But if you think of the whole process as these four simple steps, it doesn’t seem complicated at all. A loan originates from somewhere, it is processed, it’s underwritten, and then it’s closed. Simple.
However, just because the main four steps are simple doesn’t mean that there isn’t plenty of room for things to go awry. This whole book is based on the idea that a lot can go wrong with a lender, so you have to be on your toes.
With that in mind, let’s focus on the three main categories that make up a typical mortgage: rate, insurance, and size.
TYPES OF MORTGAGE RATES
Almost all mortgages are either “fixed-rate” mortgages or “adjustable-rate” mortgages. In a Fixed-Rate Mortgage (FRM), the interest rate is set for the entire term of the mortgage.
An FRM is advantageous to borrowers because they’ll know exactly how much money they will pay back on the loan and also know exactly how much each payment will be from the first day to the last day.
However, an FRM is not as beneficial to lenders because a slight turn of the economy could make a loan less lucrative in the long run for the organization. With that in mind, most FRMs have higher interest rates than other types of mortgages.
For some folks, committing to paying a bit more in interest is worth it for the peace of mind that they have a fixed amount to pay for the duration of the loan. In that case, FRMs can be the ideal choice. However, if a borrower wants a lower interest rate at the beginning, a different type of mortgage is available.
The interest rate on an adjustable-rate mortgage (ARM) is initially lower than the FRM rate, but it may change periodically. Usually, the interest rate is determined by a related economic index, such as the rate for Treasury securities. Depending on the loan, the rate could change unrelated to any index; in other words, the lender could simply decide to raise the borrower’s interest rate based on its own judgment.
Borrowers who want lower monthly payments at first can benefit from an ARM. For example, a medical student who is making less money now than they know they’ll make in the future could benefit from an ARM. They will pay a smaller monthly payment at the beginning, but then pay more later.
If a borrower chooses an ARM, they usually will have a choice between an amortizing ARM and an interest-only ARM.
An amortizing ARM is the most common type. With this type of mortgage, the lender calculates a monthly payment that will pay off the entire mortgage balance within the term of the loan (usually 30 years). However, since ARM loans don’t have a fixed interest rate, the payments most likely will fluctuate over that time period, likely getting higher and higher with each passing year (there usually is a top limit negotiated at the time of the loan).
For example, a $100,000 amortizing ARM loan would involve payments of about $278 per month for 360 months (30 years). The borrower would be obligated to pay that $278 plus interest each month. For the first few years, interest will be low, but then eventually get higher and higher.
Conversely, an interest-only ARM is less common. This type of loan puts interest payments in a preset first term of the mortgage, with the actual loaned money (the principal) paid off after that term.
Using the example above, during the first five years of an interest-only ARM loan for $100,000, the borrower is only paying interest payments on that $100,000, not the $278 towards the principal. Once that term is up, the next 25 years of payments go towards the principal $100,000. In other words, the borrower spends the first five years making comparatively small monthly payments on interest only, and then the next 25 years paying much larger monthly payments towards the principal.
Generally, interest-only loans are only recommended to borrowers who are incredibly responsible with their money and expect to be able to pay the loan off in full faster than the 30-year term. Otherwise, borrowers usually find themselves trapped in a mortgage they can’t afford a few years down the line.
TYPES OF MORTGAGE INSURANCE
Once a borrower decides between a Fixed-Rate Mortgage, an amortizing adjustable-rate mortgage, or an interest-only adjustable-rate mortgage, they must decide on the insurance for the mortgage.
There are two types of mortgage loans when it comes to insurance: conventional loans and government-insured loans. The difference between the two types is incredibly simple: government-insured loans come with insurance backed in some way by the federal government, and conventional loans are not insured or guaranteed in any way by the government.
Some typical government-insured loan types are the Federal Housing Administration (FHA) program, the Veterans Affairs (VA) program, and the United States Department of Agriculture (USDA) program. There are others and borrowers should be encouraged to search for programs that could benefit them, depending on their situation.
TYPES OF MORTGAGE SIZE
The size of a mortgage is split into two categories: conforming and jumbo.
A conforming loan is one that conforms to the underwriting guidelines of Fannie Mae or Freddie Mac, the two government-controlled real estate investment corporations. Their guidelines can get complicated, but generally all you need to know is that mortgages need to be less than a certain amount of money in order to conform to the guidelines. The amount of money that determines conformity changes from time-to-time, most recently in 2019.
A jumbo loan, as you might have guessed, is one that is larger than the conforming price set by Fannie Mae or Freddie Mac. These loans are for enough money that they present a considerable risk to the lender, and therefore are harder for borrowers to obtain.
In case this isn’t clear, let’s assume that this year the Fannie Mae and Freddie Mac conforming limits are both the same at $500,000. A conforming loan will be anything below $500,000 and a jumbo loan will be anything above $500,000.
However, due to the cost-of-living being different across the country, certain areas have higher conforming loan limits than others. Therefore conforming and jumbo loans will be different depending on your area.
Most real estate agents will only deal with home prices that fall below the conforming price, so this will rarely come up with you. However, the difference between obtaining a conforming loan and obtaining a jumbo loan is significant, so it’s important to understand the terms when dealing with lenders.
Now you know about the mortgage options on the table. Let’s talk a bit about the people involved in making the mortgage a reality.
THE PLAYERS INVOLVED IN THE LENDING PROCESS
The first person engaged in the lending process is referred to as the loan officer. The loan officer is the project coordinator, overseeing the transfer of information between you (the prospective buyer) and their organization’s processing and underwriting departments. It is likely that the loan officer will be in direct contact with the borrower from the beginning of the mortgage process all the way through until closing.
The loan officer should be licensed with the National Mortgage Licensing System (NMLS). The loan officer’s licensing status can be verified with the NMLS at www.nmlsconsumeraccess.org. The site is incredibly simple: you enter in a loan officer’s name, address, and other important information, and the system tells you if they are on the level. It will let you know if they are an active registrant in the federal database, if they are authorized to conduct business, and, if so, what organizations they are authorized to represent.
It goes without saying that if you start working with a loan officer who is not up-to-date on their NMLS certifications, you and you should not work with them. This could not only cause serious delays in the mortgage process, but could put you and you into considerable financial danger.
Once the borrower has found an NMLS-certified loan officer, the preliminary discussions of the loan can begin. This is the first step in the loan process we discussed earlier: Origination. Once all loan disclosures are executed and all income and assets data are provided, the transaction moves into the second phase, which is Processing.
The loan processor works with the loan officer to handle the loan’s documentation and tasks. For example, they are in charge of ordering the appraisal, doing title work, verifying income and deposits, checking the debt-to-income (DTI) ratio, and a multitude of other loan-related items.
Once the loan processor assembles the loan package, they submit it to the underwriting department, beginning the third stage of the loan process: Underwriting. As stated earlier, underwriting is the process of poring through the buyer’s submitted information and making sure it jibes with the requirements of the loan organization. The underwriter will focus on matching the applicant’s income, assets, credit information, property title, and home appraisal to the lender’s lending guidelines. If everything meets the organization’s requirements, a loan is offered and a closing date set. If something doesn’t look right or there is some sort of issue, the loan is denied.
Granted, the terms of a mortgage loan may have as many as 100 conditions to be met. After all, most mortgages are for fairly large sums of money, and lenders don’t want to be haphazard with their finances. With that in mind, the underwriter and loan processor may not be individual people, but rather teams of people. Sometimes the entire processing and underwriting departments of a lending organization are working on one particular loan.
With that many players in the game, you can see the importance of working with a solid, well-versed loan officer.
ORIGINATION: PRE-QUALIFICATION OR PRE-APPROVAL
The first step in the lending origination process is a pre-qualification letter sent to the buyer from a lending organization. The next step is a pre-approval letter.
You might be confused. There is an important difference between a pre-qualification letter and a pre-approval letter. A pre-qualification letter is when the lender simply checks your credit and asks some basic questions such as:
- “How much do you earn?”
- “Where do you work?”
- “Have you filed your tax returns?”
Assuming that the buyer answers the questions with satisfactory information, a pre-qualification letter is written. At this stage of the process, there is no verification of your information. You can say you make millions of dollars per year and, assuming you have good credit, be “pre-qualified” for a multi-million dollar house.
With the drafting of a pre-approval letter, the lender actually goes through and verifies the prospective buyer’s income, down payment, down payment source, and ensures tax returns have been filed if the prospective buyer is a self-employed borrower.
With a pre-approval letter, the lender is asserting that it has verified more information besides just your credit. They verify you have a good income, a solid job, or, if self-employed, have been self-employed for a long enough period to qualify for some of the lending programs that are on the market.
That’s why you want to have a pre-approval declaration or letter before really beginning the loan process with a lender, not just a pre-qualification letter. As far as I’m concerned, a pre-qualification letter is simply the first step in the loan process and not enough to start building a loan package.
Some lenders will prey on the fact that you don’t know the difference between these two types of letters. A professional lender will not assume that a pre-qualification letter is good enough to begin the loan process. I work with my customers to achieve pre-approval status before discussing anything further.
As you might know, after the housing crash we had some years ago starting around 2008, banks are now more stringent about loans. As such, a pre-qualification letter is simply not good enough to get a mortgage from a professional organization in today’s marketplace. Any lender who tells you otherwise is not a lender you want to work with.
You need a rock-solid preapproval letter.
PROCESSING: A SOLID LOAN ESTIMATE
Once you have your sights set on a property and have your pre-approval letter in hand, your next step should be to obtain a solid loan estimate for the property.
The loan estimate lists loan terms and settlement charges to be paid if a borrower decides to go forward with working with any particular lender. It is not a pre-approval, nor is it a pre-qualification. It is more of a “This is what we will likely offer you when you start the loan process and are approved for the loan.”
The loan estimate used to be called a “good faith estimate.” It’s called a loan estimate today, and it is basically an upfront quote of all the different costs, fees, interest rates, etc., that buyers can expect to pay if they proceed with a loan from that lender. It explains which charges can change before settlement and which charges must remain the same. It usually also contains a chart that compares multiple mortgage loans and settlement costs, making it easier for the borrower to shop for the best loan.
In the loan estimate phase, the various fees that are associated with getting a loan to buy a property are compiled. It is going to have estimated appraisal fees, inspection fees, and estimated closing fees.
For example, if you pay the title insurance, (which they do in some areas), then an estimate for the title insurance cost is prepared and factored that into the loan estimate.
The loan estimate is designed to give borrowers important information while they shop for a loan. Borrowers are encouraged to shop around to multiple lenders to determine which company offers the best deal for their needs.
There’s usually a length of time stated in the estimate that you can use to shop and decide. After that time period is up, the loan estimate will be invalid and a new estimate will have to be obtained.
The loan estimate may be provided by a mortgage broker or the lender. When a borrower obtains a loan estimate, it shows the lender that the borrower has at least some interest in working with them. However, when the borrower is given a loan estimate, loan originators are only permitted to charge for the cost of a credit report and are not permitted to charge for appraisal, inspection, or other similar settlement services.
PROCESSING: INTENT TO PROCEED
When the borrower is done shopping around and has decided which lender they would like to work with, they bring the loan estimate to the lending establishment and start the next step.
Working with the real estate agent and lender’s loan officer, you sign all loan disclosures, the loan estimate, and signs off on an important document called the “intent to proceed.”
The intent to proceed evidences that you are interested in moving forward with obtaining a loan from that particular lender. It does not commit the prospective buyer to get a loan from that lender. It simply states that you have signaled intent to proceed with the lender’s loan process under the terms described in the loan estimate.
Think of the intent to proceed as someone raising their hand at an auction. It doesn’t mean they are going to buy, it just means they are interested in buying. It’s just that in this case, they have to sign something instead of simply raising their hand.
PROCESSING: RATE LOCK
Once that paperwork is done, in most cases the next step is for the lender’s licensed loan officer to lock in the rate. By that I mean that the loan officer commits that the lender will give the borrower a certain interest rate on the loan.
The world of loans and mortgages is fast-paced, and interest rates can change at any time. A rate lock is important because it guarantees that a mortgage lender will give you a certain interest rate, at a certain price, for a specific time.
Exactly when the lender locks in the rate is going to vary. Some lenders lock it in at this point, some wait until a later time in the process.
A rate lock protects the borrower from rising interest rates in the period between sales agreement execution and closing (often a month). If you lock in a rate of 3.25%, you will only have to pay 3.25% interest even if rates rise while you go through the loan application process.
A rate lock is commonly good for 30, 45, or 60 days, though that time period can be shorter or longer. After that period expires, you are no longer guaranteed the locked-in rate unless the lender agrees to extend it. Therefore, arranging a prompt closing is crucial.
I once heard a story from a fellow lender about a woman who wanted to buy a home. She went through the pre-approval process and got a loan estimate. She then discussed rates with the lender and seemed satisfied with the terms.
However, she did not get a rate lock because she was in a hurry and didn’t want to go through the process at that time.
She came back to the lender three months later to finish going through the loan origination process. However, she was shocked to find that the interest rate the lender offered had increased significantly since her last meeting. The lender had to politely but firmly explain to her that without a rate lock, there was nothing she could do.
The woman ended up signing for the loan under the new, higher interest rate — all because she couldn’t spend the time to lock in that rate when she had the chance.
And really, it’s not that woman’s fault she missed out on a better interest rate. These loan processing steps are complex, with many variations on the moving parts. That’s why having an excellent lender’s loan officer is paramount to your understanding and satisfaction with the process.
The loan officer must make time to explain the documents in detail and be of great service to you. The loan officer has the obligation of knowing in detail and explaining the lender’s loan programs and requirements.
That’s why you don’t want to work with just any old loan officer. Find the one who will treat you well and walk you carefully through the steps. Choosing the right lender could mean the difference between saving thousands of dollars…or losing thousands of dollars.
PROCESSING: THE APPRAISAL
One of the most crucial steps in the lending process is the lender’s appraisal of the property. This is where the lender will determine whether or not the house is worth the amount of money they are going to lend to the borrower.
Let me warn you upfront: the appraisal process can be a wild ride.
The lender orders the appraisal. It could take a week, two weeks, or even three to get the appraisal back. This is usually not because of the lender, but because appraisal companies utilize a more complicated system than in the past. It used to be that an appraiser would stop by your house and walk through it for an hour or so. Now, things are much more complicated.
The reason for the complication is because the lender has to protect its investment. It is investing in both the home as a financial asset and in the borrower as a client. A smart lender will not loan hundreds-of-thousands of dollars to someone without properly vetting every single aspect of the borrower and the property.
While this long appraisal process is happening, a good loan officer or lender will not wait for the appraisal to come back. The good loan officer moves ahead, completing as much of the loan package as possible and submitting it to underwriting. We’ll go over underwriting in the next subsection, but it’s important to note that your loan officer should not be sitting around waiting during the appraisal. There is plenty to do!
When the appraisal comes back, your agent should review it to make sure there are not any issues. They need to ensure the value is good and that the property was appraised appropriately. They’ll make sure the appraisal does not require any repairs pre-sale.
Should the property not appraise as expected, the loan officer will notify the real estate agents involved in the loan. The agents, the buyer, and the seller, must then work out a compromise or cancel the contract.
If the appraisal results in pre-sale repairs being necessary, the loan officer will notify the agents. At that point, perhaps your agent will negotiate having the seller do the repairs for the house in order for it to appraise at the appropriate value. Or, possibly, the price of the home could be adjusted to take into account the repairs you will have to pay for. If not, again the contract can be canceled.
Check for any other issues. For example, sometimes the appraiser may note that the property is in a flood zone. If that’s the case, and the contract and the MLS sheet do not indicate that, then the agent will have to address that issue with both the buyer and the seller and work it out.
You may choose to get flood insurance, or the seller may reduce the price. They may arrive at some sort of a compromise. If not, the deal falls apart.
Unfortunately, I have seen deals fall apart for flood insurance. I’ve also seen cases where the house is incorrectly placed in a flood zone, and the seller disputes that fact with the appraiser. Sometimes the appraiser changes the appraisal to take the flood zone statute off so the closing can move forward. I’ve also seen the appraiser refuse.
This is the final step of the processing phase, and it is without a doubt the step where the most loans dissolve. Appraisals can be tough on both buyers and sellers.
Buyers usually want the house to be as cheap as possible, so they are always looking for ways to bring the price down. Meanwhile, sellers usually have lived in the home for a long time and “feel” like it has more value than it actually does, at least according to the appraisal. When you are pushing to drop the price and the seller is pushing to raise it, things can get complicated.
This doesn’t even take into account the surprises that both buyers and sellers get when the appraisal comes back. I mentioned how something like flood zones can surprise both buyers and sellers, but it happens the other way as well. One appraiser I know saw a house that had a wine cellar hidden behind a false door in the basement. Inside were about three dozen bottles of very old wine, valued at thousands of dollars each. The buyer and the seller then had to decide who got the wine and whether that should factor into the home’s price!
Like I said, the appraisal step is a wild ride.
Addressing all underwriting conditions is a crucial part of getting a loan to the closing phase. The borrower must provide everything to the lender that the underwriting department requires.
It is not uncommon at this stage to have the underwriter come back with requests for information that up until that point the borrower never knew they had to hand over. This is what happened to the real estate agent in Florida whose deal took 10 extra days when it was discovered crucial information was missing from the loan application.
This is yet another reason why a terrific loan officer is necessary for a successful mortgage. Everyone wants to stay on track for the closing date that everybody is aiming for.
CLOSING: CLEAR TO CLOSE
Once your agent addresses and resolves all the underwriting conditions, the underwriter will issue a “clear to close.” As one would expect, that means you are ready to finalize the deal.
At this point, the lender will put together the closing disclosure and provide that to your agent. You must sign it, and then, according to federal law, there is a three-day wait after the paperwork is signed. If your goal is to close by a certain date, make sure you get the closing disclosure signed at least three days before closing, so you can close on time.
Then comes the closing, the moment everyone has been waiting for. The buyer, the seller, Realtors®, and maybe an attorney, all sign the final paperwork. The deal is closed and the keys to the home are handed over to you.
The closing date is usually negotiated during the offer phase of a home sale. When making an offer, your agent will include a prospective closing date. Depending on the seller’s circumstances, it may be acceptable or may be countered with other terms.
Work with your agent closely and don’t choose a closing date casually. The right date can ensure a smooth transaction and reduce closing costs, while the wrong date puts home buyers at risk of not closing on time.
Some advice and tips:
- Give yourself enough time. Don’t set a short closing date unless you are paying cash. As you can see, there are many steps to a home purchase. It takes time for the loan process. A short closing date might predate final loan approval.
- Avoid closing at the end of the month, if possible. This is the busiest time. Unexpected issues are better dealt with if title officers and lenders are readily available.
- Ask your agent to make your closing align with the actual move from your old residence to the new house. Ideally, the move should be from one to the other without a hotel stay in-between.
- Mortgage payments are almost always due on the first day of the month with the payment applying to the preceding month. As example, if you close in July, the first payment (for August) is due on the 1st of September. However, interest is due for the month of July from the date of closing. If the close is early in the month, say on the 10th, you would have to pay for 21 days, while if closing on the 25th, you would have to pay six days of interest. If money is tight, closing toward the end of the month will reduce immediate out-of-pocket expense.
If your agent schedules a closing and fails to complete it on that day, there are consequences. You will face increased closing costs the following month, in addition to any penalty for the delay. Although sellers may work with buyers if the transaction does not close on time, failure to close opens the door to the seller canceling the sale. This happens when it’s a seller’s market, and the seller may have taken backup offers that are potentially better.
Closing can be held in any agreed location. Most happen at an attorney’s office, or at the lender’s or title company’s offices.
I TELL YOU TO AVOID COMMON MISTAKES
In my career of being a loan officer, I have seen a fair amount of mistakes made when buying a home. Let me give you an example. I heard about a buyer who found a beautiful house; he referred to it as his “dream home.” He made an offer, had the home appraised, and started the process of looking into a mortgage for the house.
When the lender met with the buyer, she told him: “You are qualified for this loan.” She knew he was qualified and gave him a pre-approval letter to show her confidence.
However, during the underwriting process leading to the closing process, the home buyer leased a new car. That new debt had a negative effect on his debt-to-income ratio, and his credit score was affected, as well. Him leasing this new car made it much more challenging to get the loan approved.
In the end, they were still able to get things sorted and the buyer got his dream home. However, leasing the car was a big mistake that could have sent everything awry.
I tell every buyer I work with upfront that there are seven things to not do while in the process of buying a house.
#1 is purchasing or leasing a car, as seen.
#2 is changing jobs. Most lenders, to approve a loan, require employment at a new job at least 30 days before approving a loan. It can be even more time for some lenders. If the borrower is on a 1099 income (independent contractor), or on commission income, lenders often require a year. I tell borrowers that if they have found their dream house, stay at your current job. If you want to switch jobs, do so after you’ve closed on your house.
#3 is buying expensive furniture in anticipation of the move to a new home. When they’re moving up in the world, the home-buyers/borrowers know they need a new washer and dryer, new kitchen appliances, and new furniture. The impulse is to arrange for those items prior to closing and moving in using either credit purchases or cash reserves (savings). This is a very bad move. As in a new car purchase, this can send the borrower’s debt-to-income ratio askew. Wait to purchase these items until after closing to ensure a smooth close.
#4 is running credit reports. I tell borrowers not to run credit reports or initiate a third-party credit check (new cell phone service, new internet service, etc.) until the loan is closed. If the borrower wants to see their full credit report, the lender probably already has it and will provide it to them. The lender is going to check the borrower’s credit again near closing to ensure the credit rating has not changed. If it has changed, the borrower may have issues with closing or even be turned down.
#5 is consolidating bills while purchasing a home. Consolidating debt is a common practice, and helps with managing monthly bills. However, even if the monthly payment may be less than the borrower is currently paying, arranging a consolidation loan while in the mortgage underwriting period will affect the borrower’s credit rating, putting obstacles in the way of a smooth approval.
#6 is moving assets between bank accounts. I advise borrowers I am working with not to move money around, because the underwriters are keeping watch and want to make sure that everything matches up with the requirements. If funds are moved around, the borrower will have to provide documentation showing where it went, and it makes things complicated and can cause delay. Likewise, any deposits made over the last two months must be sourced. So for instance, you can’t deposit $5,000 cash that was being kept in a safe at your home. No cash deposits or non-payroll deposits will be accepted. All deposits must be sourced.
#7 is the sin of misplacing or losing track of financial documents during the process. Often, buyers are anxious to pack and begin storing items in preparation for the big move. In packing the house, they pack all financial documents inside of a box and then quickly lose track of it in the packing chaos. If I call the borrower a few days before closing and ask them for a document — and they can’t find it — that could seriously affect the outcome of the loan. I tell borrowers, “Before you start moving, pack your financial documents up separately, and make sure you have access to them all the way through the loan process. Don’t do anything with that paperwork until you’ve closed the deal, the loan is funded, and you are good to go with purchasing that house.”