Avoiding the Well: Preventing Mortgage Process Problems
Since June 25, 2018, we’ve made some changes to how our mortgage approvals work. You can find out more about our Power buyer processTM.
In the 1980s there was this video game called “Pitfall”. To beat the game, you had to go through different levels while avoiding the big black holes that would lead to your character’s demise. The more you play it, the more you get used to the challenges. You can plan ahead.
The mortgage process is the same. It’s easier to avoid the pitfalls if you know what to expect. You can have a game plan to avoid them.
I spoke with Quicken Loans Senior Purchasing Banker Patrick O’Connor about the most common challenges clients face and how a little preparation can help you avoid missteps.
Normally, when we receive a gift, we are not supposed to consciously keep track of its value. This is not the point. We are taught to let friends and family do something good for us.
With a down payment gift, you absolutely have to document everything.
“A lot of times people get donations to buy a house,” O’Connor said. “Maybe they’re not looking to do it initially, but a family member finds out they’re buying a house and wants to help. We must show a paper trail of all the money that has gone to their account in the past 60 days. “
You cannot bring recently deposited cash to the closing table. This can sometimes complicate matters as the money used for closing needs to be documented and in your account for a period of time. If not, you may not be able to use those funds to complete the loan process.
Avoid a sour gift
So how do you avoid a problem while letting someone help you with your down payment? Start putting it all down on paper in the form of a gift letter.
The gift letter should include, among other things, the amount of money offered and who or where it came from, as well as a statement that the funds do not have to be returned.
On an FHA loan, lenders must also see the donor’s bank statements indicating that they had the funds in their account for at least 30 days prior to the donation.
What do you do if you suddenly receive money – maybe from your birthday or a vacation – that you would have otherwise put down on your down payment, but cannot document on short notice?
O’Connor recommends that you spend that money taking a page from the Destiny’s Child book and start paying those “bills, bills, bills.”
While this can be a helpful guideline, you also don’t want to pay off something like your car or student loans in full with that money before closing. Funds used to fully repay accounts must be documented.
“Avoid cash deposits that are around $ 400 or $ 500 or even a series on top of that,” he said. “Spend the money saved on your bills so you can accumulate paychecks in your account.”
O’Connor said people encounter another common problem when selling assets in order to quickly increase the funds available for a down payment. If this is your business, what’s the problem?
First, you can’t sell that pool table that your wife wants you to get rid of for money. The transfer must be documentable in some way in the form of a check or other transfer medium that leaves a paper trail.
The second problem, perhaps the thorniest, is that you need to be able to document that what you are selling was yours. Otherwise, the lender should treat it as a loan, which cannot be used for a down payment.
Things like selling your used car are easier than selling something like furniture because you have a title and bill of sale that you can point your finger at. Maybe you have the receipt for the pool table and a way to document things, but probably not. You also need to be able to show its value.
The last important thing that we are going to cover around source funds here are reserves. Reserves prove that you have the money to make your mortgage payment for a period of time if you lose your job or face other difficulties.
What’s covered in your reserves and your mortgage payment in general is better known by the acronym PITIA. Since I’m “pitying the fool” who doesn’t understand what PITIA means, let’s cover it briefly here.
- Home insurance
- Contributions to homeowners associations (if applicable)
Depending on the type of loan you get, reserves may be needed. Even if they’re not, O’Connor said having a few months of payments can bolster your request for approval because you seem more prepared.
If a customer has a review come back lower than expected, this can cause a problem during the buying process as you cannot get a mortgage that is more than the value of the house.
If so, O’Connor said customers have some options. The first two may not be preferable: walking away from the trade or bringing the difference between the valuation and the purchase price at the close.
There is, however, a third option. You can work to renegotiate the agreement with the seller. If they really want to move, they probably don’t want you to opt out of the deal. You also have additional leverage as you can now point to a document that gives the house a definitive value below the sale price.
Avoid credit conundrums
It is also important to avoid doing anything that could cause credit risk during the mortgage process. This is especially important if it takes longer. You might have a little trouble finding a home, for example.
Lenders try not to take credit more than once. However, one of the most common reasons they might have to do this is if your credit report expires due to a longer loan process.
If it takes a little longer, you don’t really have to worry until you take on any new debt that might upset your credit report or your debt-to-income ratio (DTI). That means not buying a new car or opening new credit accounts before the loan closes, as tempting as finance deals may seem when shopping for home appliances.
You should also avoid charging more on credit cards and using and using too much of your available credit at any one time as this can lower your score. A good guideline is to use no more than 30% of your available credit on a monthly basis. The key is really to try and maintain a status quo of your credit during the buying process.
Hopefully these tips will help you get a head start in the mortgage game so you can level up and get into your own home. Here are some more tips on close your loan smoothly. If you still have any questions, we’ll be happy to answer them in the comments.