You’re getting ready to buy a home or refinance your home with your closing day around the corner when your mortgage originator contacts you to let you know there may be a problem. Some issues may not revealed until days or sometimes weeks into a transaction. Anytime documentation is provided to the mortgage company, it has the potential to raise more questions or require more documentation to satisfy underwriting guidelines. Here are five situations to be aware of that can cause headaches during the loan process.
Not disclosing all information on your application. It could be very innocent, you forget to mention that you have children or own another property, perhaps there’s no mortgage on it. Omitting information or not being upfront with your mortgage originator can completely stall, if not derail, your transaction. Lenders care if you have children especially if the situation involves a separation or divorce. It’s possible that you owe child support and even if you’ve agreed with your ex not to pay it, what ever is of record (filed with the courts) will most likely be used. If you have a property that you forgot to add, even if it’s “free and clear” of any mortgages, we have to factor property taxes, insurance and other costs into the debt to income ratios. Pretty much everything on the loan application is verified by the lender.
Form 4506. It used to be that a 4506 was only ordered on self-employed borrowers, stated income or other “low doc” loans… now every transaction has a 4506 pulled. A 4506 is a summary of your filed tax returns and it discloses income and deductions that you report to the IRS. Even if you have a nice salary, if you claim a significant amount of business expenses, it is now common to factor that into the income on your loan application. This may cause a few borrowers to become disqualified. Another issue is when borrowers delay filing tax returns as the 4506 is required. No tax return, no 4506.
Changing jobs or income structure. Changing jobs may seem like a no-brainer. It can be done, but DO check with your mortgage originator before making any moves. Some people may be surprised to learn that changing HOW you are paid may cause some grief with the loan approval process. And it’s not uncommon in this economic climate to have an employer want to restructure your income by reducing the base income and increasing income opportunity by offering more bonus or commission incentive. It’s quite possible, depending on how you’ve been paid in the last two years, that your lender may be limited to relying solely on your new lower base income.
Large deposits. When you provide your bank statements and other asset accounts, all large deposits must be accounted for and documented. Sometimes your statements may go back a couple months so if you are in the market to buy or refinance your home, keep your checking stubs if your deposits are over $500 (may vary depending on your scenario and the lender). Be prepared to explain and document your deposits. If your bank statement shows where the deposit comes from (such as your payroll or an IRS tax refund) you should be fine…it’s when your statement just shows an undefined deposit that the additional paperwork will be required. If a deposit is a gift, that may need to be documented as well…especially if it’s being used as your down payment.
Purchases before closing or any changes to your credit profile. Many lenders are doing “soft pulls” on borrowers to recheck their credit just prior to funding (closing). If new debts are discovered, the loan will be sent back to be re-underwritten with the new debt. If the credit report is set to expire prior to closing, that new debt may have dropped the credit score and could not only impact the pricing of the borrowers rate, it could also disqualify borderline borrowers from qualifying. It just takes having a credit card being used over a certain percentage of the available credit for a persons score to be negatively impacted. Borrowers should also be careful to NOT close any credit accounts or pay off collections without consulting their mortgage originator. Closing a credit account with good history may drop your score (scoring modules love old good history vs. new accounts regardless of interest rate or what is better for your financial picture). Also, paying off a collection prior to closing causes a “new activity” on that collection which may also drop your credit score into lows you’ll want to avoid.
Bottom line, be very upfront with your mortgage originator…including letting them know if you have any vacation or time off planned prior to your loan closing. It’s very important to deal with any potential issues possible prior to your transaction instead of potentially risking your time and money should your transaction get delayed or derailed.
Photo credit of the Seattle Monorail: Brian Teutsch via Flickr