Mother May I?
Getting a mortgage approval for a home purchase may often seem like a daunting feat to some. However, any good mortgage lender should provide clear and specific guidance to borrowers throughout the entire process of the "seven deadly sins" to be aware of. Perhaps seven deadly sins may be a bit harsh, but providing specific information on "dos and don'ts" should provide the opportunity for a borrower to play "Mother May I" with their mortgage lender to ensure the smoothest possible financing experience throughout the home buying journey.
There are multiple "blunders" that can derail a mortgage, and setting proper expectations with buyers from the beginning can help mitigate any catastrophe. We'll explore some of the most damaging.
Employment and Income
Employment and income stability are significant factors in mortgage qualification. For an individual in the midst of the mortgage process or even someone thinking about buying a home sometime soon, a new opportunity could derail their qualification depending on the details of that opportunity and the impact of any change.
In some cases, going from a salaried position to an hourly may impact qualification if the hours would vary from week-to-week or if a significant part of compensation would now be from overtime. Let's say a borrower was salaried at $60,000 per year or $5,000 per month. Their position changes to hourly at $25.00 per hour for a 40-hour work week with a guarantee of 10 hours of overtime per week at $37.50 per hour. Working those hours would equate to an annual salary of $71,500. Even though that number is higher, only the base 40 hours of $4,333 could be used for mortgage qualification since there is no history of the overtime earnings, even though they are guaranteed. You need a minimum of 12 month's history of overtime to use it as a qualifying income for a mortgage.
Another example of an immediate derailment is going from a W2 employee to an independent contractor. A borrower who is a W2 employee with an annual salary of $80,000 can use that $80,000 as qualifying income. If their employer approaches them and proposes they change their compensation to $100,000 and make them an independent contractor or 1099, that initially sounds very favorable with a presumed $20,000 raise. Unfortunately an independent contractor/1099 employee is categorized as self-employed. Even if it is the same line of work, two-year's filed tax returns would be required.
Borrowers often have multiple jobs. In some cases, they may have two full-time jobs instead of one full-time and one part-time if the earning potential is greater. This situation needs to be approached delicately if in the process of buying a home or if it's on one's radar sometime soon. Income can only be considered from multiple jobs if it has been received consistently for two years. In some cases, receipt for one full year can be considered provided some other factors are also considered.
Transfer and Receipt of Assets
Unfortunately we live in a society now where physical cash is often frowned upon, and it's no different in the mortgage industry. Generally speaking, all funds used toward a home purchase need to be sourced and seasoned -- sourced meaning where did the money come from; and seasoned meaning has it been in the account for a defined period, usually 60 days.
Bank statements and asset accounts are reviewed in great detail, and any deposit deemed to be "large or unusual" will most likely need to be sourced. If the funds cannot be sourced, they will need to be excluded from a borrower's assets.
Anonymous services such as CashApp, Venmo, PayPal, etc. have gained popularity and can tend to cause issues with sourcing of funds. Although the $1,200 that a friend sent to you via CashApp to repay you for sporting event tickets may be legit, the funds most likely will need to be excluded and deducted from a borrower's assets.
Additionally, excessive transfers between multiple accounts can cause great headaches for a borrower by needing to provide significant additional documentation to the lender. In some cases funds from a transferred account may lead back to an unacceptable/unsourceable deposit and derail the entire transaction.
Credit Inquiries and New Accounts
With a new home comes the need for new furnishings -- living room, dining room, bedroom, appliances and more. The excitement of wanting to fill the new home with all these items will most likely need to be put on hold until after the loan closing. Once buyers are under agreement to purchase, many of them become visionaries on decorating which leads to furniture and appliance shopping. Because these retailers want your business, they often offer great financing incentives such as no payment, no interest for 12-36 months. Although on the surface this is appealing and sounds simple enough, it's just not that easy. Any financing such as this not only requires a credit inquiry which can damage your credit score, but it's also new debt. A new credit account with no defined payment is calculated based on 5 percent of the outstanding balance. That $10,000 in new furniture which may not have any payments for three years is calculated as a $500 per month liability by the mortgage lender, and a payment that significant could surely kill a deal.
Although there are indeed other blunders that can cause issues with a mortgage transaction, the key is having a lender who discusses the "dos and don'ts" with the client and has the same conversation again and again. Even though it's often reiterated several times, there will still be some individuals who follow their own path without comprehension, and then we can only hope for the best.
Dan Rank
Mortgage Loan Officer NMLS #140989
HomeSale Mortgage, LLC NMLS #1054689
Direct: 717.271.2400 efax: 866-849-4320
dan.ranck@homesalemortgage.com www.danranck.com
Facts, opinions and information expressed in the Blog represent the work of the author and are believed to be accurate, but are not guaranteed. The Lancaster County Association of Realtors is not liable for any potential errors, omissions or outdated information. If errors are noted within a post, please notify the Association. Posts represent the author's opinion and are not necessarily the opinion of the Association.
