The Risk of Extended Closings

With more short sales taking place, many home buyers are having to wait months before their closing date is here. The same may be true for those who are buying homes that are being constructed.  With a delayed closing, there are some additional risk involved that buyers should be aware of so they can take action, when possible, to protect themselves. Some risks, borrowers have more control over than others.

Credit Reports Expire. Credit scores change constantly and are intended to reflect your current credit scenario. Credit reports that lenders use are valid for 90 days – meaning from the date pulled from when the report is delivered to the lender (this shaves a few days off).  Should your credit need to be repulled due to an expired credit report, if your credit scores have dropped, this may impact qualifying for your mortgage program and your interest rate. Any new debts, including those that have “no payments” or “zero interest” will be factored into your debt-to-income ratios and may also impact qualifying for your new mortgage.

TIP: Do not make changes to your credit, unless advised by your mortgage originator. Closing good credit accounts may lower your scores and new credit will bring your scores down as well. Try to keep your credit balances below 50% of the total credit line (30% is even better).

Employment or income may change. Lenders will verify your employment and income prior to funding the new loan.  If you’ve had ANY changes to your employment or income, notify your mortgage originator as soon as possible. Some changes may not make an impact, however if your income is being restructured from a base salary to hourly or commission, you may have issues.

Underwriting guidelines and loan programs may change. Some times changes may be made to underwriting guidelines, or a loan program may change or no longer be available. Just last week, we were wondering what the conforming loan limits would be for the greater Seattle area (they’re staying the same at $506,000, however it was hinted they could have been reduced). We also have seen changes with private mortgage insurance companies that may impact qualifying.

TIP: If possible you may want to discuss having a “plan b” with your mortgage originator if you have any unique situations with your loan scenario.

Interest rates. I generally don’t recommend locking beyond 60 days (depending on the current climate with rates).  Longer locks are available, however they cost the borrower more. When a closing date is uncertain, locking is a risk as you may be locking too long (paying too much) or not long enough which would create additional cost with extension fees.

If rates rise too high (which can happen quickly), some borrowers may no longer qualify using their desired program…it could cause another scenario where a “plan b” is required.

Appraisals. The appraised value of your home is based on what other similar homes have sold and closed for near the home. The risk of what a home appraises for is present regardless of the length of closing, however if you’re in a neighborhood where more short sales or foreclosures are present, it’s possible the values may be trending lower. This may cause underwriting to call for additional sales comparables (comps). If the appraisal comes in lower than your sales price, you may be in position to renegotiate your contract with the seller.  Lenders base your scenario on the lower of your sales price or appraised value. If your appraisal comes in higher than your sales price, goody for you!

Documentation. Be sure to keep your bank statements, documentation of any large deposits, paystubs, etc.  This is not the time to be a “shredder”…after closing you can shred away!

Sometimes having some extra time on your side can be a benefit.  Here are some things to consider if you have a month or two before your closing date:

If your scores are lower than 739, ask your mortgage originator what you can do to improve your score, if needed (some loan programs, such as FHA, are not as credit score sensitive as conventional).

Ask your mortgage originator if you should be building your savings or paying down debt to improve your score.  Depending on your specific scenario, building reserves may be more important than your credit score or the reverse may be true.  Time allows you to do either (or possibly both).

Remember, your loan application is a reflection of you and your financial scenario when the first interview is taken and at closing. It is your responsibility to notify your mortgage originator of any changes from the original application.

If you are considering buying a short sale anywhere in Washington State, where I’m licensed, I’m happy to help you with your mortgage needs.

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