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Friday, June 18, 2004

Preapproval For A Mortgage Is Only The Beginning

by David Reed

Have you ever wondered why lenders mess up deals? Didn't your loan officer tell you that you were approved? Way beyond your initial approval, many items have to be verified before you get to closing. Sometimes these verifications can throw a wrench in the entire transaction. Some can derail the project altogether.

When you apply for a mortgage loan you're asked to document your file. If you say you make $50,000 per year, your lender won't ask you to take the Scout's Oath. No, they'll call or write your employer and ask them if you work there. Maybe they'll ask you to provide a recent paycheck stub or last year's W2.

If you say you're self-employed they want to see verification of that, too. Do you have a business license? Business tax returns? Business bank statements? Speaking of bank statements, a lender wants to see if you have not only just enough money to close the deal -- the lender may also want you to have a few months' cash reserves lying around, to go buy groceries or whatever.

On the other hand, your property needs to be verified as well. First, is it really there, is it in good shape and is it worth what you are going to pay for it? You might also have an inspection, perhaps for structural defects or in some states to make sure you don't have any termites munching on your mansion.

Here's a real story from yours truly. I recently closed a transaction for a guy who said he wasn't self-employed; that he worked for another company. I saw on his application that his title was "President" of the company, so I asked for some clarification. Did he own 25 percent or more of the company he works for? If he did, he would be considered self-employed and underwritten to a different standard. In this case, he would had to have owned this business for two years or more, which he hadn't.

He sent me an email stating that he only owned 24.9 percent of the company. Fair enough, but we also received a letter from their accountant stating he owned 25 percent, not 24.9 percent. No real problems at this point, only that we were a week away from closing and we still couldn't nail down his status. He told us that his accountant was indeed correct, that he was self-employed. I had to stop his loan application, and resubmit on another program. Due to the nature of the property and the loan size, it had to be underwritten by two different people, once by us and once by the investor. This added another week to his loan approval. We missed the closing date, but were fortunate to be able to reschedule for a few days later.

Another loan got sidetracked when it was determined that the money used for the downpayment and closing costs were partly from borrowed funds. At the outset, the loan was credit approved, based upon verification of assets. We moved right along, still waiting for the borrower to provide bank statements. After over two weeks, the borrower was still telling us that she couldn't find her statements but that she would have them any day. We instead sent a form to her bank asking for a three-month history of her account, and while it showed that she had enough money in the bank, it also showed that she had a sizeable deposit in the previous month. So sizeable that unless she won the Lotto her current income couldn't support such an amount.

I called her and she said that she had borrowed those funds from three credit cards and deposited the money in the bank. Ouch. Downpayment money can't be borrowed from other accounts (excluding qualifying retirement accounts). The deal died. She either had to find more money or buy less house. She chose to find a smaller home.

Just because you've got that official looking "approval" letter in your hands, no one's handing over the keys just yet. Your application needs to be verified via third parties. Oh, and let's not get into the house that had hidden termite damage. Lots of wheels begin to turn after you receive your credit approval, sometimes those wheels hit a speed bump that can delay or even kill your deal.

Published: June 18, 2004

David Reed, author of the The Hip and the Hype, a guide for lenders to the Internet, is also a columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Mr. Reed, based in Austin, TX, is the Director of Internet Lending for SouthTrust Mortgage, a subsidiary of SouthTrust Bank, one of the 20 largest banks in the United States.
Reed is a member of the Mortgage Speakers Bureau, and addresses consumer and industry groups nationwide regarding technology and mortgage lending issues.

Copyright © 2004 Realty Times. All Rights Reserved.

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