How to Make Sure Your Mortgage Doesn't Get Nuked at the Last Minute
You might have heard the horror stories from homebuyers about mortgage companies dropping the ball just before the sale closes. But there are ways to anticipate the changes before they happen…
Rates & Loan Fees Change
Nothing can be more frustrating for consumers than when their interest rate and loan fees change during the loan process. However, taking precautions to reduce the likelihood of this occurring should be among your mortgage loan officer's top concerns from the start. Your loan officer should review all the details of your loan to help mitigate any possible challenges that might pop up later on down the road. Granted, this is a lot easier said than done, as there are many facets of putting together a solid mortgage loan, but here are common problems you – and your loan officer – can anticipate.
Your appraisal comes in at a higher loan-to-value. This is a big driver of cost. The higher the loan-to-value, the pricier the loan can be. Let's say your 30-year fixed-rate mortgage is locked in at 3.99% on the assumption you have 30% equity or more in your home. Then your home appraisal comes in, revealing you have 20% equity in your home and now your 3.99% interest rate now costs one discount point plus closing fees (1% of the loan amount). Depending on the size of your loan this could easily be several thousand dollars more for the same interest rate, based upon a disparity in perceived home valuation versus actual valuation. In this capacity, it probably would've been more prudent to take a worst-case interest rate upfront – appropriate for 80% loan to value-type financing — to prevent a negative change.
Your credit score is not as high as you think. If you get a mortgage rate quote for a 740-range credit score and it turns out it's actually 715, that can make your loan pricier. A good best practice is to allow a mortgage company to provide you a real rate and cost quote based on an actual score.
Your income is lower than what's stated on the initial application. When you apply for a mortgage loan, you tell the mortgage loan officer what your income is and they verify this income with your supporting documentation in the form of tax returns, W-2s, pay stubs, etc. Before ordering an appraisal, a reputable lender should analyze your income in its entirety, and position your loan for an approval when the appraisal valuation becomes known. This reduces the likelihood of your loan possibly becoming problematic down the road due to debt load.
Undisclosed debt. Even if it's not on your credit report, it's still a liability that must be accounted for. Make sure your mortgage company knows if you owe any child support, alimony and tax debt, to name a few.
Cash to Close Change
When there's a change in the cash needed to close the deal, a mortgage company is forced to suspend your loan. A suspended mortgage loan is not denied, but is also not an approved one either, because it requires more assets to close the loan or more supporting documentation. A common example is when you're trying to qualify for a conventional mortgage loan, then it's revealed that you have a higher debt-to-income ratio. This can force the mortgage company to have to switch mortgage loan programs – such as going from a conventional loan to an FHA loan that has more flexible qualifying parameters, but at the cost of the more expensive mortgage to the consumer.
Other Surprises to Anticipate
There are other common not-so-fun changes that can pop up during your loan process. They include, but are unfortunately not limited to, the following:
Loan limits per county. Make sure when you're buying or refinancing a home that the program you're looking for meets the county loan limit in the area in which the property is located. For example in Sonoma County, Calif., the maximum conforming loan limit is $520,950 and any amount one dollar above this amount becomes a jumbo loan.
Loan size changes do happen. For example, a jumbo loan – which starts at $1 above the max conforming county loan limit — touts very attractive rates and fees. Typically, borrowers looking for big mortgage loan sizes are stronger on paper, have more equity and/or more cash to close coupled with strong credit scores. Unfortunately, the investors who buy the jumbo mortgage-backed securities today do not take too kindly to when an applicant does not fit neatly inside their guidelines. This means if a consumer happens to be deficient in one of these areas, for whatever reason, they would get downgraded to a conforming loan. This may mean having to finance less, and increase the cash to close to keep the transaction alive.
A certain loan purpose or loan structure is not allowed. This one does happen frequently, when the underwriting doesn't accept certain types of scenarios. Let's say the borrower has multiple financed properties, and the loan officer locks the interest rate with an investor that only allows for four financed properties. In such an instance, you would be looking at an additional low-level pricing adjustment that would make the loan more costly, and you'd have to change loan programs during the loan process. This would result in the need for more supporting documentation and more diagnostic overall credit review.
Before starting the house-hunting process, it's helpful to know where you stand, credit-wise. You can get two free credit scores, updated monthly on Credit.com, in order to help you know if you need to take time to build your credit, or if you're generally in a good range to begin the process. It's also a good idea to know how much house you can afford so you can target your search for a home you're better able to afford.
The best possible way for a borrower to prevent surprises in the mortgage loan process is to make sure every detail is accounted for. Disclose every material fact in its entirety. Even the simplest, smallest detail could cause issues down the road if not discussed and supported. Let the loan officer with whom you're working take an overly accurate loan application, and provide them with all supporting documentation and explanations they need so they can give you the options. Taking the time and due diligence in planning your mortgage loan needs on the front end cannot only make the mortgage loan process so much easier, but it can also save you time and money through closing.
More from Credit.com