Master Today’s Mortgage Underwriting Rules In No Time
By Paul Esajian on January 6, 2016
How can real estate buyers master the mortgage underwriting process, and close faster?
One of the toughest parts of buying and financing a property is making it through today’s mortgage underwriting conditions. Truth be told, mortgage pre-approval letters, loan quotes, and even commitment letters can mean little. Actually getting a loan funded and closed requires satisfying all of the underwriting conditions that are served up when a loan commitment or ‘approval’ is received. This list can easily be 10 or 20 items long. By anticipating what these conditions are and knowing how to satisfy what lenders are looking for, borrowers can fast track their loan apps and real estate closings.
Preparation is Key
We all know what we get when we fail to prepare. The same holds weight when applying for a real estate loan. Interrogating your loan officer in advance to determine any possible issue or condition that could come up is smart. Even before looking for property, buyers should get a head start by gathering and storing their documents. Some of these documents can take a month to get, if not longer. If you don’t start pushing for them until well into the transaction, you may have already doomed yourself. Make sure to get certified copies, gather all pages, and keep both hard copies and copies in the cloud where they won’t be lost, and can easily be forwarded from. Keep them updated regularly.
Let’s take a look at some of the common documents and conditions you’ll be asked for, and how to solve them:
Bank Statements
Expect to be asked for two to three months of recent bank statements. Lenders want to make sure you have enough cash to close and in reserves. This is notoriously more than you are quoted upfront. They want to see all pages to make sure there are no ‘large’ deposits, that there aren’t payment obligations you haven’t reported, or any other surprises. Note that only a portion of your stocks and investment account balances will qualify as they can change value rapidly.
Tax Returns
Expect to provide your last two years of tax returns. Lenders will want all pages and schedules. For self-employed individuals they want to see your adjusted gross income (AGI), which they use to calculate your debt-to-income ratio. In some cases they may add back deductions to your qualifying income. Note that there can be issues if your income is declining. You will need to provide copies of the signed tax returns you filed with the IRS, and they will be verified with the IRS. If you don’t have copies they can take weeks to retrieve from the IRS. At the time of writing this piece the IRS transcription service was in the middle of being down for around 2 weeks. All tolled that could add a month to your loan underwriting time.
CPA Letters
Self-employed borrowers will often be asked to provide some additional proof of their self-employment. This is beyond 1099s or tax returns. As idiotic as it may seem, it’s a fact. Just get ready to deal with it. If you don’t have a business license or incorporated company you’ll likely have to provide a CPA letter. Make sure you know exactly how this needs to read, and if you can find a CPA to provide it, before you get into the loan and make a deposit on a home. Most CPA’s aren’t going to risk their licenses lying for you; and that’s what underwriters are counting on.
Divorce & Child Support
If you’ve been divorced and pay child support, or receive child support or alimony you’ll likely need to provide proof of all the numbers in the form of a copy of all pages of these documents. Go for certified copies to be on the safe side. Unfortunately, these aren’t freely available online like other documents. Expect to have to travel to the county where you filed, and visit the Clerk of Court in person, or mail a request, with money orders, and wait up to 3 weeks, or more.
Insurance
You’ll need insurance to close. This will often be a minimum of the loan amount or rebuild cost. You may need general homeowners’ insurance, special disaster insurance for your area i.e. flood and wind. Today lenders are also asking for interior insurance on condos, something they didn’t used to require. Obtaining these insurances can require obtaining elevation certificates and surveys, or having physical inspections too. Sometimes insurance can be paid at closing, in other cases it will need to be paid prior to closing. How much your premiums are can also alter your debt to income ratio and loan approval.
Occupancy Requirements
Some loan conditions come into play at closing and last for the life of your loan. This includes occupancy status. If you are claiming to be buying the property as a primary residence, lenders, regulators, and note buyers will check up on that. You’ll normally sign agreements that you’ll occupy the property within 60 days of closing, and will start for 1 year from that move-in date. Today lenders are armed with numerous tools to check up on this including; utility bills, social media, phone calls, credit reports, in person visits, mailing addresses, and more.
Other common loan conditions include credit reports and letters of explanation for bad credit, inspections and appraisals, proof of gift funds, and HOA approvals. The better prepared you are the more successful you’ll be in buying and financing real estate.