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.
What Determines How Much Home You Qualify For – Part 2: Funds for Closing
December 22, 2010 by 1 Comment
In Part 1 of this series, I reveal that home buyers qualify for the mortgage payment first based on their income. The next major factor is the down payment and funds for closing. Some may say that the down payment more important than the mortgage payment, however the down payment actually can be a variable; one may be able to obtain gift funds to increase a down payment. You cannot change your income unless you add more qualified borrowers.
Your Ethnicity and Race on the Loan Application: Section X
December 1, 2010 by Leave a Comment
Back on "Section X" of a residential mortgage loan application, borrowers are asked to check boxes to indicate what their ethnicity and race are.
It's not unusual when I take a loan application and the borrower wants to mark the box that it's none of the the government's business. I don't blame them…but I wonder if they're aware that when they check "I DO NOT WISH TO FURNISH THIS INFORMATION" that mortgage originators may be required to guess depending on how the application is taken.
Check out the fine print on the loan application:
"If you do not furnish ethnicity, race, or sex, under Federal regulations, this lender is required to note the information on the basis of visual observation and surname if you have made this application in person."
I can tell you from days in the escrow biz, this can be kind of awkward when you're signing someone and the person across from you says "why is this box marked stating that I'm ….?!!" Your loan originator probably had to make their best guess.
The Home Mortgage Disclosure Act (also referred to as HMDA, pronounced hum-da) along with Regulation C requires lenders to collect this information to make sure that lenders are not discriminating.
From Fannie Mae:
X. Information for Government Monitoring Purposes
This section is included to aid the federal government in monitoring compliance with equal credit opportunity, fair housing and home mortgage disclosure laws. Supplying this information is strictly voluntary on the part of the applicant, but lenders should ask all applicants to provide it, including those who apply by telephone and through the Internet, and should describe the reason for collecting this data. Race and ethnicity are separate categories, and although the lender should ask applicants to furnish information for both, applicants may furnish one but not the other. Note that there is no longer a place for applicants to indicate race as "Other" but applicants may check as many races as apply.
The Home Mortgage Disclosure Act and its implementing Regulation C generally require Lenders to collect sex, race and ethnicity data on all applications.
When an application is taken in person and an applicant elects not to provide some or all of this information, federal law requires the lender to note the applicant's sex, ethnicity, and race on the form, based on the lender's visual observation or the applicant's surname. To aid in identifying applicants who may be of Hispanic ethnicity and who elect not to self-identify, the lender may wish to consult the list of Spanish surnames developed by the U.S. Bureau of the Census. Furthermore, the lender may wish to advise the applicant that he may complete or change the information in this section after the application is approved, at any time up until closing.
And from HMDA:
If an application is taken entirely by mail, Internet, or telephone, and the applicant declines to provide information on ethnicity, race, or sex, the lender must use the code for "information not provided by applicant in mail, Internet, or telephone application."
The only way to not participate in disclosing your ethnicity or race on a loan application is to completely apply on line or mail. I'm wondering, if a person understands why this information is being collected, why would they not want to participate?
LQI: The Potential Kiss of Death for On-Time Closings
August 11, 2010 by 1 Comment
If you're planning on getting a mortgage to purchase a home or for a refinance, please do not obtain ANY credit, increase your credit debts (use your credit accounts) or please don't even THINK of applying for new credit until your new mortgage loan has funded and closed. Why hold off on shopping for your new fridge or washer and dryer that you're going to need or that new sofa from Pottery Barn? Because it could delay your funding (i.e. closing) or worse–it could disqualify you for your loan (kill your deal) right when you're expecting your transaction to close!
Fannie Mae has created Loan Quality Initiative (LQI). According to Fannie Mae, LQI is intended to prevent mortgage lenders from having to buy-back mortgages by increasing the quality of the loan that is being sold to Fannie Mae. LQI addresses more than undisclosed debts on the loan application, including occupancy and borrower identification issues. However in my opinion, the re-verification of credit prior to funding has the potential to impact a transaction more often.
LQI requires that if new debt is discovered when the credit is reviewed, that it be disclosed on the final application. New debt is not limited to a new credit card you used to purchase appliances, it could be that you made a charge on an existing credit card that increased your monthly payment. Maybe you simply filled up your gas tank at $3.00 a gallon…this could possibly trigger a delay in a transaction closing if the borrower has higher debt-to-income ratios or average credit scores. If new debt or inquires are discovered just prior to funding, the loan may have to be sent to underwriting again to include the new debts payments.
Most lenders are doing "soft pulls" on the credit (without the credit score) also referred to as a credit "refresh". However, if new debt is discovered and the loan is sent back to underwriting, a new full credit report may be pulled. If the borrowers mid-credit scores have dropped, this may impact qualifying and possibly the interest rate since conforming rates are based on credit scores. Not so refreshing, is it?
So if you are considering buying a home or refinancing, please do not:
- apply for any credit or loans after you've completed a loan application;
- use your credit cards during the transaction (increasing your borrowed amount on your credit line);
- pay off or close any debts during your transaction without first speaking to your mortgage originator (this can actually drop your credit score).
As tempting as it might be to purchase your fridge (or what ever) so it's ready for your new home when you move in–please don't!! It may cause a delay in your closing or cost your mortgage approval and at this point in the transaction, your financing contingency is most likely waived!
I understand Fannie Mae wanting higher quality loans and that the loan application should reflect the borrower. However everyone knows that the day after closing, the new home owner is probably going to purchase some new appliances and maybe make a trip or two to Pottery Barn or Restoration Hardware. This is a classic example of how the underwriting pendulum is swinging too far. I can tell you that my typical client today is more qualified than those of the subprime era, our current guidelines alone (pre-LQI) have done this. NOTE: Please be responsible whenever using credit…especially after just taking on the largest debts you may have in your lifetime: a mortgage.
PS: Real Estate Agents: please be sure to make your buyers aware of this newer policy.
Photo credit: Rob Young via Flickr
Moms-to-Be CAN Qualify for a Mortgage
July 23, 2010 by Leave a Comment
Recently the New York Times published an article stating that expectant mothers were being denied mortgages partially due to guidelines such as Fannie Mae's Lender's Quality Initiative. I'm not sure if this was a case of bad reporting or a bit of fear from the lenders part of LQI, where loans may possibly be denied at closing if the loan application changes. HUD has announced they are investigating this as discrimination against expectant mothers and new parents.
From HUD's Press Release:
"…FHA requires its approved lenders to review a borrower's income to determine whether they can reasonably be expected to continue paying their mortgage for the first three years of the loan. FHA-insured lenders cannot, however, inquire about the future maternity leave. If a borrower is on maternity leave at the time of closing, lenders must document the borrower's intent to return to work, that the borrower has the right to return to work, and that the borrower qualifies for the loan taking into account any reduction of income due to their leave. Meanwhile, HUD is currently reviewing Fannie Mae and Freddie Mac's underwriting guidelines to determine if they satisfy the Fair Housing Act, including income verification of persons taking parental or disability leave…"
The New York Times article references a mother from Washington State who's mortgage was almost denied due to her maternity leave:
Elizabeth Budde, a 33-year-old oncologist who lives in Kenmore, Wash. She nearly lost her mortgage after a loan officer learned she was home with her newborn.
With stellar credit and a solid job, Dr. Budde said she had been notified via e-mail that she was approved for a loan on June 15. But that note prompted an automatic, “out of the office” e-mail reply from Dr. Budde’s work account, which said she was out on maternity leave.
The next day, Dr. Budde received a second e-mail message from the lender, this time denying her loan approval. Since “maternity leave is classified as paid via short-term or temporary disability income,” the e-mail message said, it could not be used because it would not continue for three years.
The message also said the lender could not consider her regular, salaried income because she was not on the job. “I was really shocked,” Dr. Budde said. “At the time, they didn’t know how I was getting paid for my leave.”
In the case of this new mom, her base salary would have sufficed for her loan approval to not be in jeopardy had she disclosed this to the mortgage originator assuming this mortgage originator knew their underwriting guidelines. (Sounds like this mortgage originator either didn't know her guidelines or her lender has very strict underwriting overlays, in my opinion).
It's assumed there are no changes to your loan application between the time of application and closing. If you have changes to your employment, income, assets or credit during your transaction, you need to let your mortgage originator know as soon as possible. Verification of employment (VOE's) are performed prior to closing (funding) and in some cases, credit may be re-verified. LQI (Loan Quality Initiative) requires that lenders do pre-funding reviews to make sure that the loan application is accurate prior to funding. Per Fannie Mae:
The pre-funding review process should include controls or checks that test the accuracy of the loan data to ensure the information obtained is correct (e.g. borrower identity, employment, financial information, property information).
Anyone, man or woman, planning on taking any leave from their employment during their loan transaction should let their mortgage originator know.
Photo: My brand new Mom (with me).
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