BY SAM BROCK, SUPREME LENDING AND MEMBER, CCAR’S REALTOR®/LENDER COMMITTEE
Your buyers have finally gotten an offer accepted on the perfect property, in the perfectneighborhood, with the perfect school district. Congratulations! They’ll be closing in September, you will have a new listing in their existing home, and you luckily have buyers ready for it as soon as it hits the market. When the contract is submitted to the lender with whom they prequalified in May, you receive an email reply simply saying, “Call me on this, ASAP please.” What could the lender need? They did the prequalification already; you know the lender does a great job, and you know the borrower looks good. What in the world has happened?
The months of August and September are wrought with opportunity for your buyers to damage their mortgage qualification status. Through what would normally be viewed as sound, financially prudent decisions, buyers can negatively affect their ability to qualify for some of today’s most widely used mortgage programs. Here’s how:
Credit Cards: Retailers flood consumers with ‘Back to School’ and ‘Labor Day Savings’ sale ads, and then pile on the discounts for opening a store credit card when they check out. For some buyers, a single inquiry can cause their FICO score to decrease below acceptable levels. For others, the new account’s monthly payment may increase their debt-to-income (DTI) ratio over what is allowed by guidelines. Even if the promotion states that there are ‘No Payments for 6 Months,’ the lender will have to ascertain what the new payment will be and add that to the list of monthly liabilities used in calculating the DTI. This can be especially detrimental with larger purchases such as appliances.
Auto loans: Traditionally, auto makers release their new models in September and October, which means dealerships are motivated to move their current inventory to make room for new models. There are often great deals to be had in August and September, and financing terms can be very attractive, but the DTI change can be a deal breaker. With many loan programs, an installment debt, such as a car loan, can be left out of the DTI calculation if there are 10 months or less remaining on the loan. If your borrower’s qualification includes a debt being omitted because of the length of time remaining, a new car loan, even with a lower payment than his or her existing car loan, will force the payment back into the DTI calculation, potentially causing that individual to exceed allowable guidelines. Again, the inquiries, especially if the buyer did what he or she should and shopped rates with multiple lenders, can cause his or her FICO score to decrease.
Student loans: Cosigning for a college-bound child’s student loans may appear relatively harmless, but changes to agency guidelines over the last few years now oblige lenders to include 1% or more of the outstanding balance in the DTI, depending on loan program. Even if the payments are deferred, lenders have to include a monthly payment in the DTI ratio. The payments that the parents and child have no intention of making until later can damage their qualification status.
Tax returns: Many taxpayers file extensions for their personal and/or business tax returns in the spring, with the plan to file later in the year. As we all know, these extended returns must be file by October 15. If they haven’t gotten around to it yet, a loan closing in early October can easily be extended past that date. There are no exceptions available in most cases, and an unfiled return or a filed return with an outstanding balance due can cause a lender to keep a purchase from being able to fund.
The bottom line is that in the constantly evolving landscape of mortgage guidelines, everyone has to keep everyone else in the loop when making financial decisions. Lenders, REALTORS®, and buyers have to be vigilant and communicate openly until the loan funds. Through open, honest communication with all parties, great local lenders, like those in the CCAR REALTOR®/Lender Committee, can keep your buyer’s hopes of homeownership alive and well, no matter the season.