Ensuring a Smooth Closing in 2011

Avoiding problems in underwriting; Keeping a strong credit score; Making sure documentation matches

You’ve probably heard the stories. Stories from people trying to buy homes who have submitted dozens of pages of documentation, only to be met with endless requests for more documentation, excuses, and, ultimately, a loan denial. It’s frustrating, upsetting, and downright insulting what is happening to many families. The worst part of all is, in many cases, it’s avoidable.

It’s true that the market has made things a lot tougher for home buyers. Many difficulties have arisen due to an epidemic of  “buy-backs”, that is, lenders that wrote mortgage loans have been forced to buy them back from investors who purchased them, often for seemingly meaningless reasons, like the wrong date on a pay stub, or a punctuation error on an insurance binder. The result of this is that bank underwriters are much more careful in their review of documents.

Rather than diving too deep into the problem these buy-backs represent, let’s examine some of the problems that have been found, and ways to prevent them affecting your application. One of the most prevalent problems found is matching errors between information shown on various home buyer documents. One client I worked for recently wanted to refinance her home to take advantage of current low mortgage rates. She had owned the home for a few years, but she had never updated some of her important documentation to match the new address. As a result, it appeared from her pay stubs, bank statements, and insurance documents that she still lived at the old address.

It’s very important to promptly update your address with employers, creditors, lenders and banks as soon as possible on moving. While it might not seem to be such a big deal, especially with everything else going on around the time of moving in, this is extremely important to underwriters, and can cause significant delays to your closing. Think about it as a basic part of moving. You unpack all your stuff; update your address, too.

Another area that creates significant additional questions is inquiries in your credit report. You get a credit inquiry every time a company requests your credit for the purpose of granting you credit. Think of it as the banks’ way of tracking where you’re applying for new loans. Most home buyers have very few credit inquiries, often only 1 or 2 related to searching for the right mortgage. This is often not an issue for a mortgage approval.

It can be a different issue altogether when a credit report contains numerous inquiries for various different purposes. A common scenario I’ve seen is when a buyer had applied in the last few months for a card at Old Navy to get the extra 10% one-time discount offered there, then, after getting mortgage pre-approval and a contract to buy, they head to the furniture store.

Many mortgage pre-approvals today are based on very tight margins, where even a small increase in monthly budget can turn an approved loan into a denial. Now, it’s natural to think that you’ll need furniture for your new home, and you probably will! During the mortgage process, though is not the time to get it. You see, underwriters are requiring home buyers to explain any and all credit inquiries that appear in their credit report. If the credit requests turned into new credit accounts, then, those accounts will have to be considered in the underwrite. Even though the the furniture store may be offering no payments for 6 months, future payments will have to be incorporated into budget review.

Another problem that can be caused by credit inquiries is damage to the credit score. Each credit inquiry has  a small effect on credit score, which varies depending on the type of inquiry, and the number of recent inquiries. Mortgage inquiries cause relatively little change (and none if they are subsequent mortgage inquiries within a 21-day period), while credit card, and especially store charge inquiries can do substantial damage. Once you’ve settled on where you’ll be getting your mortgage, it is important to avoid any further requests until after closing.

Tax returns are becoming more and more important in 2011. Prior to 2009, most home buyers didn’t have to supply tax returns with their mortgage applications, but, due to a number of cases of fraud involving falsified tax returns, banks are verifying tax filings of all home buyers today. This means that they will review that information even if it’s not submitted to them. There are a number of ways in which this can delay a mortgage process:

• Change in filing status (single –> married, for example)
• Undeclared rental or business income (or, especially, loss!)
• Unreimbursed employee business expense
• Certain deductions (mortgage interest when no home is owned, student loan interest when no loans on credit, etc.)
• Taxes unfiled for one or more years

These, and many other surprises can come from the review of tax returns. If you have any questions about whether your tax return could cause concerns, it would be best to review your returns with your mortgage advisor before finalizing an offer on a home. While most entries on a tax return are relatively innocuous, the degree to which this documentation is currently scrutinized demands an overabundance of caution.

I’ve only scratched the surface of the surprises that can come up during the mortgage process in 2011. Credit inquiries, tax return verifications, and address discrepancies are among the most common challenges seen lately, and most issues there can be mitigated by providing enough documentation and explanations upfront.  Thank you very much for reading our review of this situation. Please feel free to contact us with any questions not answered here.