We’ve all been there — a home purchase and mortgage loan goes sideways or we get a surprise as we get closer to settlement. As rates start to increase this year and inventory still low, it’s more important than ever to educate homebuyers of actions they must avoid or risk being turned down for a mortgage.
Recently, one borrower failed to inform me that he was changing jobs one week prior to settlement. The loan was still completed, although it was delayed three weeks as he needed to provide a first paystub and the employment verification had to be completed.
There are always going to be problem transactions, and lately, there seem to be more of them. The rush is on to get our clients the winning bid and loan approval.
Many of these issues can be avoided with better preparation and conversations with our clients. Here are five things the home buyer must avoid to ensure they secure their home.
Avoid: Changing jobs during the loan process
Changing jobs can have a significant impact on the home buyer’s ability to secure a loan approval. It can even impact the home seller and put them at a major loss if they’re purchasing a new home.
A part of the loan process is a final verification of employment a few days prior to the settlement date. Employment income and work history are important factors in determining a borrower’s ability to repay their loan. Home buyers must be upfront with the information they provide.
Adding several intake questions for your clients about their employment plans and explaining the importance of not changing jobs are critical steps. If they must change jobs, the loan officer needs to be informed right away.
Avoid: Moving money around
Moving money around when you’re purchasing a home can be costly. Many people don’t understand this issue and how it relates to their loan approval. Even new loan officers don’t always pay close attention to bank statements. All assets that a borrower has, including the money in their bank accounts, must be sourced, meaning the underwriter must see where the funds originally came from. Large deposits and transfers of money are typically questioned by the underwriter.
A common mistake that home buyers make is taking money from a savings account and putting it into their checking account without letting the loan officer know. Luckily, this can be traced with the information on the bank statement. Doing something like that can cause a delay in a final loan approval as more documentation or a letter of explanation from the home buyer might be required.
Avoid: Not checking credit reports before a loan application
When credit is pulled for a mortgage loan, home buyers have been surprised to learn of errors on their credit report. Delinquencies, disputed accounts, and incorrect information are all common issues.
Consumer Reports conducted an investigation in mid-2021 and found that more than one-third or 34% of all Americans found at least one error on their credit report. There has been a noticed increase in homebuyers who are opening disputes on their credit reports over the last 90 days, as well.
Pulling credit at the time a homebuyer is looking for a home to purchase is not always good timing. Our clients should pull credit prior to searching for a home, so they can resolve any issues. Remind your homebuyer that they can pull credit once a year for free through annualcreditreport.com.
All three bureaus that lenders use can be accessed there. A common misconception is that Credit Karma or other applications are correct. Credit Karma only pulls two of the three bureaus that lenders use. We recommend consumers pull credit twice a year so any issues discovered can be mitigated quickly.
Avoid: Taking on new debt
Once a homebuyer’s credit is pulled, some buyers believe they are free to do what they want with their credit. We all know this is not true. A client of mine opened a store card and purchased $10,000 worth of furniture and home goods. They also opened a line of credit prior to settlement. They lost the home as the new debt put them over their debt-to-income ratio.
The danger lies mostly with first-time homebuyers as the emotion and excitement of buying their first home takes over. When you make decisions based on emotion, they tend to be the bad decisions.
The best education is for loan officers and real estate agents to be redundant in their communication about not taking on new debt. Having multiple conversations with your clients up front and during the entire loan process is critical. Loan officers should have disclaimers on their pre-approval letters, as well.
If a client must make a big purchase, such as a car or they have a home emergency, they need to let the loan officer know right away so the new debt can be properly calculated in their ratios.
Avoid: Looking for a home before securing a pre-approval
To tie all of these important things together, nothing is more critical than securing a pre-approval or conditional loan approval upfront, especially with the continued low housing inventory. Many lenders offer a conditional loan approval with a to-be-determined property. This means that the homebuyer’s credit, employment and income are reviewed, and a purchase price is plugged into the loan. All the home buyer has to do is find that property!
Taking these steps puts the homebuyer in a competitive advantage. They will be ready to make a strong offer and know the range they can go to in a bidding war. More importantly, if the pre-approval is completed correctly or the loan is conditionally approved with a to-be-determined property, all borrower documentation has been reviewed, and it will make the loan process move quickly and efficiently.
If we all work together with our clients and help them avoid these mistakes, our clients will be in a better position to win the home of their dreams this year!
Joe Rychalsky is co-founder and senior loan officer at All In Mortgage Inc.
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