5 Essential Homebuying Tips from a Former Mortgage Loan Officer
MAKE SURE THE PROCESS IS AS SMOOTH AS POSSIBLE
The home buying process can be overwhelming, even for the financially savvy or experienced buyer. Stricter lending rules are partially to blame, but the bigger problem is you, dear buyer.
Yes, there are exceptions to every example, but during my years as a loan officer the biggest hurdle in 90% of delayed closings was the buyers’ lack of preparedness. I get it, it’s far more pleasant to parse Trulia or Realtor.com for your dream home than it is to spend hours organizing your financial documents. However, when you apply for the loan, don’t be surprised if it hits a roadblock because of your procrastination.
To illustrate my point, let me tell you a story that I’ve experienced more times than I care to recount:
The Story Of Joe
“Joe” wants to buy a house so, naturally, the first person he calls his real estate agent. The agent tells Joe he needs to get his financing in order, but Joe shows up to his viewing appointment empty-handed. Joe’s agent doesn’t want to waste his time, and he doesn’t want Joe to go to another agent, so he takes him out anyway.
Of course, Joe finds the perfect home on that first viewing; since it’s a seller’s market, his agent advises him to make an offer before another buyer snatches up the property. Joe frantically calls his loan officer at 5pm on Saturday evening, letting her know he needs a pre-approval right now! His loan officer silently seethes, while interrupting time with her family to get Joe’s pre-approval ready.
Joe submits his offer Monday morning and the seller finally reviews his offer Friday. Lo and behold, Joe doesn’t get the home. The process rinses and repeats ten more times before he has an offer accepted. After thirty viewings and thirty pre-approvals, his real estate agent and loan officer are exhausted, but at least the end is in sight.
Three days after his offer is accepted, Joe goes on LendingTree and sees that a competitor bank is offering a rate that is 1/8th of a percent lower than what his loan officer’s bank can give. Joe decides to apply with the other bank so he can get a better deal, and ignores his loan officer’s impassioned follow up calls and emails.
The loan officer at the new bank is thrilled to get Joe’s business…at first. The deal needs to close in 30 days, but Joe assures his loan officer that his financial situation is very good and he makes LOTS of money. Upon questioning, however, Joe reveals he is self-employed. His loan officer urges him to send the required documentation as soon as possible, but that night Joe starts helping his children with their homework and forgets to call his accountant.
When Joe finally sends his documentation a week later, his loan officer discovers that yes, Joe has LOTS of income, but he also has LOTS of expenses. Since Joe’s file now requires an exception, it has to go through multiple levels of underwriting. Joe’s processor and underwriter have 50 files on their desks that need to be looked at today. Joe is getting impatient. He’s thinks just because he’s done what he needs to do, the process is complete.
When the underwriter finally reviews Joe’s file, she realizes there is important documentation missing and sends his loan officer to collect it. Joe can’t believe it; he’s provided everything short of a blood sample already, but after huffing and puffing, he finally sends the missing documents.As a result of the new documentation, the underwriter discovers that his income does not meet the lending guidelines and declines the loan. Joe is irate and blames the bank for delaying his process, not understanding his individual situation, and wasting his time. Meanwhile, his real estate agent and both loan officers have done hundreds of hours of unpaid work and have to deal with anger from Joe, Joe’s attorney, the sellers, the listing agent, and the seller’s attorney.
How Can You Avoid Becoming A "Joe"?
1. STOP LOOKING AT HOUSES BEFORE HAVING YOUR FINANCING IN ORDER
Really want to impress a seller?
Go into your first viewing with a pre-approval letter in hand. This advice is so common that it’s a cliché, but so many people fail to listen that it bears repeating (see Joe above).
Pro tip: Some banks allow you to get a Mortgage Credit Approval Letter (equivalent to a Commitment Letter) before you have a house under contract. This means your file has already been reviewed by an underwriter and you are approved for a loan, provided that the information in your file does not change. This does two things – One, in a situation where there are multiple offers on the same home, showing the sellers you’ve gone above and beyond puts you at an advantage. Two, if you spend the time upfront working through any possible underwriting issues (especially if you own other properties, have any credit issues or are self-employed) you will be able to close about two weeks faster.
2. ORGANIZE YOUR DOCUMENTATION AND HAVE IT ACCESSIBLE
Many preventable underwriting delays are created because the buyer’s documentation was not in order. Your loan officer is not a mind reader so it’s possible, even likely, that the underwriter will ask for additional items after the first review. Having the basics at hand, and knowing where to find the rest, will significantly reduce the stress for everyone involved. Here are the typical documents needed:
Salary Only (no non-salary income sources)
2 Years W2s
30 Days Paystubs
60 Days Bank Statements
Self-Employed and/or Other Non-Salary Income
2 Years Tax Returns
Accountant's Letter or 12 Months Bank Statements for any business-paid expenses
60 Days Bank Statements
Retirees
Most Recent Social Security Award Letter
2 Years 1099s
Most Recent Quarterly Retirement Account Statement
60 Days Bank Statements
3. KEEP YOUR CREDIT CLEAN
Most banks require a minimum FICO score of 620-640, and it may be higher, depending on the type of property, the down payment or other risk factors. There are four major factors the credit bureaus consider when running your score:
A. Late payments and defaults – a single 30 day late is not going to kill you, but keeping track of your bills will pay off. Bankruptcies and foreclosures are a huge red flag to a lender. Even if they don’t prevent you from moving ahead, they will require significant documentation to show you’ve improved your financial situation. Typically, charge-offs and delinquent accounts need to be brought current or paid in full prior to loan approval.
B. Credit utilization ratio – simply put, how much you can borrow compared to how much you’re actually borrowing. The lower the better, so pay off or pay down credit cards 30-60 days before applying.
C. Number and timing of inquiries – Any time you apply for a new credit card or purchase a car, your credit score will temporarily drop. If you’re shopping rates (hopefully before you settle on a bank, see number 5) the credit bureaus take this into account and combine all inquiries into one. However, if you open several credit cards in a short amount of time, your score will drop significantly. Avoid applying for credit at least three months before applying for a loan.
D. Number and age of accounts – Make sure you have at least three accounts that you pay on a monthly basis. They don’t have to be paid in full for a payment to count either. Foreign nationals and those with a limited credit history can sometimes use a “non-traditional” credit report. The lender can get an overview of your payment history by looking at alternative sources including rent payments, gym memberships, cell phone bills, car insurance, utility bills or other. Make sure these accounts have at least 12 months of payments.
4. KEEP YOUR BANK STATEMENTS CLEAN
Any time there’s a deposit that appears unusual it’s the underwriter’s legal responsibility to review it. If you can’t provide documentation, the bank can’t use it as part of your transaction. Plain and simple. That said, don’t make any cash deposits into your account, or transfer large sums of money, from the moment you think about buying a home, until your deal closes.
Your best bet is to set up ONE account you’ll use for the down payment and closing costs, and then move any money you’ll be using for the transaction into it long before you apply for a loan. If you can’t follow that advice, be fully prepared to document the source of any unlabeled deposits or transfers from point A to point B all the way to point Z. If you are expecting cash payments or large gifts that you won’t need to use (lucky you!) put that money into a separate account and don’t make any transfers into the account you’re using to purchase the home.
5. LAST BUT NOT LEAST, BE RESPECTFUL OF AND LOYAL TO YOUR REAL ESTATE AGENT AND LOAN OFFICER
It’s OK to interview multiple real estate agents or shop for the best rate, but PLEASE do it before you commit to either. Your real estate agent AND your loan officer both work on commission, meaning until and unless your deal closes they do not get paid for any work they do. The home buying process is incredibly complex and 75% of the work your team does happens behind the scenes. Show your team that you’re respectful of their time and appreciate the hard work they do, and you’ll be surprised how far they’ll go out of their way to accommodate you when your process truly needs to move quickly or requires special attention.
IN SUMMARY
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