The below article about the top reasons for real estate loans going bad came across my email this week. I thought it really explained what could happen to a loan while in the "pending or contract" phase.
See, most people think that the hardest part of selling a home is the marketing phase, i.e., getting the word out to the public and that once we have a ratified contract, the hard part is over. Customers think that getting to closing is easy and that they can start packing.
Oh, I wish that were the case! Real estate agents who have been in the business a while know that the hard part is the "pending or contract" phase because there are so many moving parts, so many parties involved and so many things that can go wrong.
After we go under contract, we are at the mercy of so many other parties - lenders, appraisers, underwriters, inspectors - and many things can "go bad". It is frustrating and mysterious sometimes because we really don't know what is going on behind the scenes and yet, we the real estate agents, are the messengers and have to try and interpret why a loan went bad and how to solve the problem, how to keep our clients calm, and how to give our clients guidance.
When buying or selling a home, I cannot stress enough how important it is to choose your team well. Professionals whom you trust, whom you have vetted, who have a lot of experience and who are accessible.
Top 10 Reasons “Loans Go Bad”
1. Got No Time Left
In the market that we are in, one of the #1 ways to sabotage a smooth closing is having unrealistic expectations for the time it will take to close.
I have been in this industry for almost 20 years and I have never seen it this hot. Right now, many of our competitors are taking 60+ days for closings with 2 weeks in underwriting. In our commitment to our purchase business- and to never close late or ugly- our office is asking for a minimum of 18 business days from the time we get the contract in our hand (providing that we can order the appraisal and the title work immediately). It is taking 2 weeks to get tax return verification through the IRS.
It is important to also understand that appraisers, title companies, inspectors, underwriters, etc, etc are maxed out in this unprecedented market and over commitment will only lead to frustration.
2. Needing 411- Lack of Disclosure/Information
So many times we think of this when it comes to sellers. But when a buyer is not up front with the lender, there is a very good possibility that the transaction will blow up during the verifications.
Lenders are required now to verify tax returns, employment, income, and bank accounts as well are various other information. Stated income loans no longer exist and it is important to understand that mortgage companies have no room for error or tolerance for misleading information.
It is vital that the buyers get all their documentation upfront so that there are no surprises at the end.
3. Gimme More - Delay of Information/Documentation
The guidelines are tighter and underwriters have no “wiggle room” to overlook any discrepancies and over documentation is the name of the game.
It is important that borrowers get all requested documentation to their lender immediately and upfront and also understand that there is a very good possibility that more will be asked for during the process. The world of common sense is out the window and only hard documentation will suffice to get a loan approved, insured and securitized on the back end.
4. For What It’s Worth
With the implementation of HVCC and CU, an appreciating market and the tightening of guidelines and the major penalties (including suspension of an appraiser’s license) for any discrepancies, the art and opinion of appraisals is harder than ever.
Lenders want the majority of comps to be within 90 days and second review appraisals are very common (and subject to underwriting discretion). If you cannot find the comps, neither can the appraiser - there is no secret to this :).
The old "adage" of if the buyer is willing to pay it then the appraisal should reflect it. HVCC and CU took care of that. If the comps are not there, it will not appraise.
5. What You Don’t Know WILL Hurt You
Our market is too volatile, guidelines are changing so quickly and yet we still have a lot of Loan Officers still trying to “practice” government loans (i.e., FHA, VA, USDA) and bonds as they only originated Conventional in the past.
Buyers using inexperienced loan officers (or bank or call center “order takers”) to handle the most important financial transaction of their life is like having a 1st year med student perform open heart surgery on them.
Don’t let inexperienced loan officers and call center order takers “practice” on your loans. Trust only experienced and knowable loans officers that are highly competent and passionate about their commitment to their buyers and know what it takes to close smoothly.
6. Wastin’ Time- Even (and especially because)
In this volatile time period in our market, we are continually amazed when realtors and buyers write up contracts on properties without having the buyer be pre-approved through a knowledgeable mortgage professional.
Speaking first (not after) with an experienced loan officer before writing up a contract is so important and eliminates wasting the time of everyone involved.
7. Calculate This
To make certain that closings go smoothly, it is important to ensure that buyers AND sellers understand their cost involved before agreeing to a contract.
This seems to be so simple, yet we see the opposite on a daily basis. It is important for the buyer (or agent) to contact us once they have found a specific home so that we can run the numbers again to make certain that they are comfortable with the out of pocket and estimated monthly payment (and can then call the listing agent and let them know that they have been pre-underwritten as part of our First Assure Program).
8. It is NOT Like The Old Days
Currently, Conventional Loans Are Not a “Catch-All” for Distressed Properties. We still hear on a weekly basis “The property has foundation; The property is distressed; The property is in bad condition…… so we need to go Conventional”.
Did you know that PMI companies (needed on Conventional loans with less than 20% down) is just as strict on property condition as FHA?
9. Flip This House
According to FHA and USDA guidelines, a property of re-sale occurring 90 days or less from the date the seller acquired the property is not eligible for FHA insurance.
In addition, the contract to purchase this home using FHA or USDA financing CANNOT be executed until the 91st day. It is very important to understand the Flipping Guidelines so that the closing is not delayed or comes to a screeching halt.
10. The Times They Are ‘A-Changin’
It is so important to understand that we are in a market unlike most of us have ever experienced. Guidelines are tighter for credit, income, employment, assets, ratios, down payment as well as other factors. A perfect example of this is that lease agreements are typically not allowed to offset current house payments for those buyers' properties.