When my buyers Josh Schnepper and his wife Jonelle sought to buy their dream house to start a family in Marlton, they got a rude awakening - figuratively and literally.
Their mortgage representative with one of the major banks didn't seem at all interested in getting his business, despite the fact he had exceptional credit and a 25 percent downpayment. Still, the bank preapproved the negotiated purchase price of $280,000 for the property.
As Schnepper funneled paperwork and more paperwork to the lender, and with the planned closing date in mid-February closing in, his bank representative told him that if he could come up with $230,000, they'd loan him the remaining $50,000.
"We told her to go pound sand. It was ridiculous," Schnepper said. "Between that and the rudeness of the representative, I got the impression the heavy hitters have no interest in doing business with consumers right now when it comes to mortgages or refinances, because the interest rates are so low."
Many home buyers fail to realize that you're not actually "approved" for your purchase until all the paperwork goes through the lenders' underwriting department. And with cutbacks in staffing among lenders, often that doesn't happen until two weeks or less before the scheduled closing date.
There's a big misconception that getting pre-approved means you're off to the races and can shop for that dream home up to the price you've been signed off for. In fact, you may be unpleasantly surprised as your close date draws near and your mortgage falls through. The situation is exacerbated when you're dealing with a Mortgage Loan Originator who lacks experience.
There was a time when banks would, in fact, pre-approve a loan based on an early assessment from the underwriting department, giving the buyer carte blanche to shop, and a competitive edge when putting in a bid on a property. This was significantly more meaningful than a prequalification, which simply means that a bank has anticipated you will get a loan up to a set amount based on a cursory look at your finances.
But significantly tightened lending standards have essentially made that gold-seal preapproval impractical. A full approval nowadays means poring over every outstanding debt, every shred of income, every entry in your credit report, and every investment report - whether or not those funds will be used for the transaction - along with intangibles such as stability of your income and potential cash-sucking problems with the property. All of this takes time and money, which most banks are no longer willing to commit early in the loan process.
I've seen buyers look at dozens of houses and spend hundreds of dollars for an appraisal and home inspection, only to learn that the mortgage for which they thought they had a commitment won't materialize.
In my opinion about 90 percent of failed real estate transactions are the result of loans not coming through at the last minute. This is a huge problem for the real estate industry because when buyers drop out it forces the sellers to make drastic decisions such as dropping prices, or in some cases finding themselves in foreclosure. However, some lenders are taking a more common sense approach and underwriting loans up front, so there are no surprises or any confusion right before getting to the closing table.
Common sense is something that's been severely lacking of late.
If banks only knew how much time is wasted, by all parties involved, in getting a buyer and seller under contract only to have the buyer not qualify in the end. The closer to the settlement date that this happens, the greater the domino effect in cancelled transactions if the first seller is buying another home. These problems can be avoided by using a lender that knows their bank's underwriting process and all that actually goes into a loan approval.
To make the process this difficult really harms people's perception of their ability to purchase a home. As a Realtor, if you aren't skilled at setting the expectation, explaining how difficult the process can be, and that buyers, sellers, agents and lenders all have to work together to get the job done, you could lose a deal and possibly a client.
With all the potential pitfalls of obtaining a mortgage these days, the old-style linear thinking by mortgage professionals just doesn't apply anymore.
Every situation is different, very few people can skate through the process, so you need professionals who are not just experienced but have the ability to think creatively to get deals done, especially when there are extenuating factors, like self-employment.
Here's some tips when seeking a new mortgage or a refinance:
Don't take the word of your mortgage representative as the gospel. You aren't really approved until you're approved. Don't waste your time looking at houses until you confirm your loan has been underwritten. If they won't agree to this, switch lenders.
Make sure your financial house is in order. Organize your tax returns, W-2s, and two to three months worth of bank, investment and credit card statements. Get your free annual credit report (www.annualcreditreport.com), or pay for reports from the three major bureaus, so you can anticipate and respond to issues that might raise a lender's eyebrow.
Go in with eyes wide open. Lending criteria have been tightened drastically since the last time you may have purchased a home so don't assume you're approved. "I had a client who literally had $1 million in the bank and an 800 credit score, but when he tried to borrow $200,000 he didn't qualify because of technicalities with proving his income.
Work with a seasoned mortgage professional. They are the "filter" between you and the underwriter. A lot of experience goes a long way, especially if things go wrong or there are special circumstances involved, such as a long gap in employment or a past bankruptcy.
Don't get discouraged. It's not personal, though it might feel VERY personal. Some of the requirements are mandated by Federal and/or state law, so all lenders have to fulfill them. Keep your eyes on the prize - your dream home - and remind yourself that you'll get past all the headaches of getting there.
Feel free to contact me anytime with questions or for a personal consultation. Good luck!