Tips To Avoid Refinance Potholes
By Neil Funsch
What’s new in the mortgage world, you ask?
Well what’s not new is that mortgage interest rates are still low, despite the persistent predictions of inevitable rate hike. It’s a procrastinator’s paradise. Here’s a typical exchange:
“Have you done your refi yet?”
“Naw, I know I should but it’s so much trouble … and the paperwork, they poke their noses into all your business and leave your feeling violated. They want to know everything!”
Well, there is some truth to that, I say. They will look at everything that affects your ability to pay back the loan, your willingness to pay back the loan and the security you are offering in the case of default. But for most people, the list is not too long.
Your income is determined by your last two years’ tax returns, what you report on your 1040 is what you get credit for. Your available cash to close is what is in your bank, stock or retirement accounts based on your last two months statements or new deposits from paychecks, tax refunds or the sale of an asset like stocks or real-estate. Your collateral is based on the value and condition of the property as reported on your appraisal.
It all sounds so simple, and sometimes it is. But in fairness lots of peoples’ financial lives are more complex. But not only that, sometimes what people do after initiating a mortgage cause additional stress causing complications. What follows are three common areas where mistakes are made.
Every dollar scrutinized
If you are starting the process, realize that every dollar that goes into your bank accounts will be scrutinized to make sure that it is legitimately yours and has not been provided by some interested third party in the purchase transaction. Some examples would be a realtor or a mortgage lender who, motivated by wishing to earn a commission, might attempt to help a buyer qualify by providing them with funds to close. Or, a seller who wants to sell their property might offer kickbacks. So a borrower has to prove the source of all deposits that show up on their bank statements.
Cash on hand that you have in case of Armageddon or a sudden emergency cannot be used as part of your down payment and should be kept where it is and never deposited because where it came from cannot be proven.
Any deposits must be sourced, i.e. they have to come from earnings or a sale of assets. Gifts can be used, but only from a family member and have to be identified as such and accompanied by a gift letter that states who it is from, their relationship to the borrower and that there is no expectation of repayment.
11th hour scrambling
A second area concerns credit. Early in the process a credit report is pulled. This report gives an overall credit score showing the borrower’s ability to manage credit. Along with your credit score the report also shows how much overall debt you have, and the amount of your monthly payments for that debt.
These payments are used to determine how much of a mortgage you can afford. The report also shows all of the credit inquiries/applications for credit that a borrower has made in the last 120 days. The common mistake here is for new homebuyers to go out shopping for appliances for their new home, and then sign up for a promotional 0 percent interest deal.
Lenders will always pull a new credit report a few days before closing and this will show up and call for some 11th hour scrambling to get often difficult-to-obtain documentation. These new “deals” could affect credit scores and payment ratios and possibly kill a deal.
Avoid the can of worms
A third area involves the property when it is a purchase transaction. Buyers will nearly always have an inspection done. In an older neighborhood like Park Hill it is common for some property issues to be uncovered that the borrower would like to have fixed and they then negotiate with the seller to either repair some items or adjust the purchase price.
At this point it is important to communicate with your lender on how to proceed. Since home inspectors are paid to be thorough in order to protect their client the buyer there are usually lots of items that are identified.
When an item becomes a part of the contract it will need to be fixed and re-inspected prior to closing. That is a normal occurrence, but can add time to the transaction. What needs to be avoided is any reference to “issues uncovered by the inspection“ in the contract if possible.
Once it is referenced as an inspection item then the lender’s underwriter will need to see the whole report, potentially opening a can of worms with any items deemed to affect safety and health requiring repair.
The road to a mortgage can be difficult enough without adding potholes along the way.
Neil Funsch has been a mortgage broker for 19 years, the last eight in Park Hill. He can be reached at 303-229-2684 or email@example.com.