In today's real estate climate, getting a pre-approval on a loan doesn't mean you can kick back and go on a shopping spree to furnish your soon-to-be dream house. With stricter regulations mandating a further credit probe before borrowers close their mortgage, real estate experts are advising prospective home shoppers to keep their financial situation static until the deal is finalized.
Starting June 1, Fannie Mae has a new rule going into effect which requires the lender to check for additional lines of credit, such as a new credit card or a car lease, that a borrower may have obtained that have not been reflected on the credit report over the course of the loan process.
According to Keith Stewart, a mortgage broker with Northpoint Lending Group, Inc., the directive enforces more accountability on the part of the lender, but it isn't an entirely new mode of operation. "When I pull the credit for my clients, I tell them we are going to get approved on a financial snapshot," says Stewart. "We don't want to change that until we close."
In light of the new regulation, we talked to a pool of mortgage brokers, who shared tips on dodging mortgage closing debacles and streamlining the process.
Tip No. 1: Get the house before the car
Across the board, mortgage brokers say that opening new lines of credit is the easiest thing to trigger the lender's attention, especially with the news of Fannie Mae's mandate. For example, this means opening up a store card at Lowe's to get a head start on buying some new appliances or paint or leasing a car to have something shiny to park in your new garage.
New credit obligations, such as as credit cards, increases a borrower's debt-to-income ratio (the amount of debt including mortgages, car loans, student loans, credit cards versus overall income). Fannie Mae sets the maximum for the debt-to-income threshold at 45 percent of a borrower's gross monthly income. Breaking this cap --even after pre-approval--would result in a defunct loan.
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New credit cards, in-store credit cards, student loans and car leases are other forms of credit that drive up a borrower's debt ratio.
Grant Stern, president of Morningside Mortgage Corporation in Miami, Fla., believes car loans are "the No. 1 culprit" in lenders turning down a prospective buyer's home loan. "We always tell people as mortgage brokers, 'Get the house first, then they will give you the car," he says.
Tip No. 2: Don't switch professions (or tax brackets)
Brokers say its not earth-shattering to change jobs in the same field, especially if you are making more money at the new place of employment, but it's complicated when a professional is moving job classifications, for instance, from employed to self-employed, or from a salaried-position to a commission job. "Moving from an employee to a contract basis is a dagger," says Stern, as two years of federal tax returns need to be included with a loan application. "[In this case], it could take three years to get approved for a mortgage."
As another precaution given the nation's high unemployment rate, Stewart says it's becoming routine for lenders to get a verbal confirmation of a borrower's employment status on the day of the closing.
Tip No. 3: Try not to move around big sums of money -- even deposits
One broker says keeping your financial situation unchanged is not only refraining from withdrawing large sums of money, but also avoiding making big deposits of money in any of your bank accounts from pre-approval to day of closing. To qualify for a mortgage, one of the requirements is proof of all assets, including checking, savings, stocks or bonds, and if this is checked at any future point, the borrower may need to provide records of the fund's origins.
"That's what tight lending is these days -- providing documentation," says Jay Sondhi, a mortgage consultant in San Francisco. "What they are concerned about is that a large deposit may be borrowed money."
Though more money in your bank account is not going to sabotage your qualifications for a loan, complying with documentation requirements and time delays may make a closing a mortgage a bigger hassle.
Tip No. 4: Monitor the balance of your credit cards
Though the credit score formula is deemed an enigma by many, the balance that's riding on your credit cards plays
a big part in determining your credit score. Higher scores result in borrowers being able to secure better interest rates.
For example, during the loan process, if a borrower's credit report is pulled again, a lower score may be caused from higher levels of debt reported by the credit bureaus. The consequence of a lower score may cause the borrower may either lose their interest rate or have to pay a price adjustment to keep it, yet another bump in the road.
With tight lending policies and stricter, more spelled-out regulations in the post-boom era, getting a mortgage has become increasingly confusing for the consumer. But keeping your finances transparent and steady will help simplify the process.