Receiving a mortgage is not as easy as it used to be. Aside from the drastic changes in programs, there has been a dramatic change in how loans are currently underwritten. Gone are the days where a mortgage broker could get items pushed through that otherwise would take days. In today’s lending environment, every deal is scrutinized with a fine tooth comb. Not only have the underwriting procedures changed, the entire process has a series of checks and balances. Moreover there are potential pitfalls in every step of the mortgage process. As an investor, it is up to you to understand the entire process. The more you know, the better prepared you will be.
It is not that lenders wouldn’t want to loosen their guidelines and open the floodgates. The issue is that they need to be able to sell the loans somewhere. If the loans are sloppily underwritten, they won’t be able to sell them on the secondary market and would be forced to put them in their portfolio, which is something they do not want to do. Much of the issue with the mortgage crisis was due to lenders underwriting and approving deals in a hasty manner. As a result, there has been a tremendous overreaction, leaving lenders to review every section of every new loan.
The first issue deals with the down payment and credit score. The FHA still offers a purchase product with only 3.5% down, but there is no such program for investors. The minimum credit score depends on the specific lender, but it is in the ballpark of 700. This is considered an above average score – bordering on excellent. Coupled with the score, you also need a down payment of at least 20%, with some lenders requiring up to 25%. The money has to be what is called “sourced and seasoned” for at least 60 days and cannot be a gift. The only money used for the purchase must be from the borrower on the application and not a spouse or anyone else looking to get involved in the deal. Credit score and down payment alone present a hurdle, but it is far from the only obstacle.
Once you are involved in the deal, the first obstacle will be the appraisal. Much has changed in the appraisal order process over the past few years. If you are working with a broker, they are no longer allowed to order the appraisal with whatever company they please. The lender they are submitting the loan to will contract out the order. There can be no communication between the broker and the appraisal company. This restricts the amount of persuasion the broker can have with the appraiser, but it also has led to orders going to companies that don’t fully know the market. There is also increased scrutiny on the appraisal company to provide a detailed report of every inch of the property.
Every dollar that you are using for your down payment must be verified and explained. If you plan on using a cash deposit you received 45 days ago, you may have a difficult time providing a paper trail and using these funds. Before you get started, you should provide all income and asset documentation to your mortgage broker or lender so they can pick and choose the best lender for you. In some cases you may have to wait until you are a full 60 days past a specific deposit to get the process started. This money could be from rents received or other legitimate sources, but if you can provide a paper trail you may not be able to proceed.
What is on your application and credit report when you apply may not be what is underwritten before you receive a final approval. If you have even the slightest change of income, employment or credit score, your approval can be changed at the 11th hour. Some lenders will re-pull your credit before they send closing documents. If you have recently opened an account or were late on one from the time of application to the time you close, you will have a problem. A deal is never fully ready to close until you are at the closing table and the funds are wired into your attorneys account. Problems can happen at any stage of the process; from the time of application all the way until the closing. Even if you are approved, it doesn’t mean the lender can’t find something they have issue with and change their minds.
If you are using lender financing, you should have patience and be prepared to supply many more documents than you think you need to. This is how lenders currently operate and it doesn’t appear to be changing any time soon. A deal is never done until you are at the closing table. There are many potential pitfalls during every step of the loan process. Make sure you know how to navigate around them.