Summary: The excitement of a new home purchase can sometimes override wisdom and prudence when applying for mortgage financing. The importance of maintaining steady income, good credit and decent equity can fall by the wayside. An experienced loan officer helps to keep an applicant on track.
Buying a new home is an exciting prospect, especially for first-timers. Property ownership typifies the American Dream and those with the means to attain it look forward to it with some satisfaction and anticipation. Everyone is well advised, however, to tread carefully when seeking the financing for a new house in Washington, Idaho, Colorado, and Oregon.
Euphoria and desire can sometimes blind a prospective homeowner to the perils and pitfalls of getting and keeping a mortgage. Numerous lenders and loan products are there for the selection while interest rates are at unprecedented lows. Yet hidden dangers await the unwitting.
Bringing Too Little Cash to the Transaction
Many would-be borrowers work out calculations that begin and end with the down payment. That may be a standard down payment of 20 percent or of a lesser amount if private mortgage insurance (PMI) is included. In either event, the down payment represents a significant portion of what a borrower needs to bring, but other monies are due and payable beyond this.
Lender fees may be collected at closing, as well as title charges, attorney costs, recording fees, and any commissions due to buyer’s agents, etc. Some of these might be paid in advance of closing, but they must be factored in nonetheless.
Another unanticipated outlay is for escrows. Lenders have a stake in the new house. It is their collateral. Therefore, losing it in a fire or to a county sheriff represents an unacceptable financial hit. Accordingly, it is in the bank’s interest to make sure the insurance premiums (hazard, flood, and mortgage) and property taxes are paid.
This is done through escrows, whereby the lender collects a monthly portion of these obligations, paying them directly when they come due. Depending on when the loan closes, the mortgagor may collect an escrow reserve amount, sometimes large, at settlement. Not only do borrowers have to pony up for these requirements, but they also need to demonstrate some degree of continued liquidity after the closing.
Exaggerating Annual and Monthly Revenue
Every applicant, of course, wants a quick and uneventful approval. In getting one, though, they might see fit to go with the rosiest scenario pertaining to income. What does this mean? It can mean any number of things, actually. For instance, an employee who received a generous bonus last year might bake that bonus into the annual income cake for the sake of the application, combining it with regular salary or wages before dividing by 12 for a monthly amount.
Technically, the applicant can claim truthfulness. Still, lenders will not look at bonuses as consistent and dependable unless a consistent history is documented. Therefore, the inflated figure would be reduced for underwriting purposes.
Extra income may qualify or it may not. A home business that brought some money in the previous year but nothing in the prior years could be excluded. Underwriters would want to see a long record of positive performance before giving any side hustle the benefit of the doubt. Likewise, a promised raise in salary is not a higher salary. Gifts, lottery winnings, and any other one-time payment do not qualify as income, except to the IRS.
Misrepresenting Financial Condition
When interest rates are low and home prices in WA, CO, OR, and ID are reasonable, desire can sometimes overrule integrity among mortgage loan applicants. Tweaking income with bonuses and other less reliable inflows is unacceptable but more a reflection of wishful thinking than dishonesty. Outright deception, on the other hand, is not only fraudulent but unsustainable.
There is too much information out there regarding debts, bank accounts, investments, and taxes to try to put one over on a lender. Finance companies and banks cannot sell their loans without verifying everything.
A credit report does not just convey a FICO score; it provides detailed information on consumer debts. While it may not always be accurate in every line, the lender depends on it in evaluating an applicant’s credit status. If there is an error, the burden of correcting it rests with the applicant. In the same way, bank statements and similar documentation are sought to verify customer claims regarding assets. Tax returns demonstrate the veracity of income claims. Employers are contacted to confirm that the applicant is still retained.
Quitting a Job
Sometimes a job opportunity comes along that is irresistible. The salary, the benefits, and the challenges are just what you have been looking for. In the midst of a mortgage application, however, jumping to a new employer can be problematic, if not fatal, to the chances of approval and closing. Lenders like to see longevity among their borrowers.
It speaks to reliability and steadiness and translates into steady and reliable payments throughout the term of the loan. While switching jobs might be workable depending on all other benchmarks, e.g. credit, assets, and equity, it is excellent, it will nevertheless slow the loan approval process down considerably. The new employer will have to provide evidence of the hiring and certain terms of employment.
If the applicant has less than two years at the prior job, moving to a new position might be too much for a lender to accept. Job-hopping signals an unstable work history and, possibly, an erratic payment future. Although mortgage investors like Fannie Mae focus on the stability of income itself, rather than a particular job, too many employers complicate a loan application, especially one already in process.
Worth noting is the fact that most lenders will verbally re-verify employment shortly before a scheduled settlement. A borrower who gets a new job should always report this to the loan officer ahead to the closing. The lender will find out one way or another. Best to hear it from the customer.
Impairing the Credit Score
Numerous borrowers have had to settle for higher interest rates, or face rejection from a lender altogether, because of their credit scores. They are outraged because they have always strived to pay their bills on time. Things, however, can get missed. Outstanding remittances of trivial amounts have been known to lower credit scores by dozens of points, maybe more, if left unattended.
The best thing to do is to make sure every obligation is up to date before signing a mortgage loan application. Additionally, ordering a credit report of your own before applying is also wise if you are unsure of where you stand.
One further caveat is that a credit report is valid for only 90 days. Usually that is enough to approve and close a loan but unforeseen events do occur such as failed home inspections, liens discovered through title searches, or environmental problems requiring mitigation, for example.
If the process extends past three months, the lender is obliged to run another credit report. It is wise for borrowers not to make large credit card purchases or finance a new car during this time. If the score is lower than before, the loan may have to be re-underwritten.
Hear from the Pros before Applying
Speaking with a loan officer well-versed in the latest credit guidelines (yes, they do change) is the best first-step for new home buyers to take if they wish to apply for a home loan. Seasoned professionals can warn pre-applicants about these and other mistakes that plague people who seek new home financing. The smoothest mortgage transactions are those entered into by borrowers who have all the facts.
Need a Home Loan?
Sammamish Mortgage has been around since 1992 and has assisted many home buyers all over the Pacific Northwest. If you’re looking for Mortgage financing in Washington, Oregon, Colorado or Idaho we can help with our mortgage programs. If you have any questions related to mortgages, you can contact us. You can you can View Rates on our site or Apply Instantly or even obtain a Rate Quote instantly.