First question: would you rather have fresh brewed coffee or Taster’s Choice? Many wouldn’t mind Taster’s Choice, but that being said, all of you who are coffee drinkers know that fresh brewed will taste much better. I myself have rarely tasted any instant coffee better than fresh brewed, although Starbucks has a great instant. Brewed takes longer and, consequently, in most cases, tastes better. Usually, “better” takes effort and planning. OK, I know, so this is a mortgage article not a foodie review, but the not-too-deep message is: faster is not better, and therefore we can conclude that a faster online mortgage may not necessarily be better, although, I have to admit, it does sound great.
If you are an in-the-box type of borrower, and really know your financial situation, you may be able to get a quick, reliable online approval, although an online approval—now please pay attention, real estate professionals—in and of itself, leaves out many conditions and possible unforeseen deal altercations. Keep in mind the old computer clich? “garbage in garbage out.” Even if you enter every piece of your financial information perfectly (meaning, you may be able to enter in your income, liquid assets, job title, date of birth) and even if you get a quick approval, keep in mind that the mortgage approval, as all mortgage approvals, typically are conditional. You may be asking yourself, “Conditional upon what?” As they say, there lies “the rub” (not as in what you put on meat, we are done with the foodie analogy).
Underwriting guidelines determine if you qualify, and they do not come with the online approval, not to mention the lack of professional advice regarding mortgage rate and product selection. So, who cares? ANSWER: YOU DO! If you are the kind of person who doesn’t like last-minute surprises, pay attention. You will now find out why faster online approvals, although they may get you the purchase contract, may not be totally reliable—and when you are buying a house you want reliability, not a three-day-before-closing surprise issue that may surface. I have outlined just some of the, not all, inclusive, financial criteria below that borrowers have no idea exists but lenders look at, and keep in mind that residential underwriting is not always based on logic, but making sure that the loan is salable to the secondary markets. The one caveat with underwriting guidelines is that they aren’t always written in stone and can be offset with what’s known as “compensating factors” (e.g., borrower credit is not excellent, but a large down payment is made).
Here we go:
Income—If you are a W-2 employee, you can get full value on the gross income to qualify. Issues usually arise when a person is self-employed, going through divorce, and/or has capital gain income. In order to get the credit for your income, you generally need filed tax returns. A classic example of what one type of borrower’s thought process might be and the possible issue might go like this: Borrower says, “I made a mil this year in 2016 and nothing in 2015, so I should be a slam dunk, right?” No, because 2016 was not filed yet and so there is no income to average. You may have to wait until 2017, or if there are plenty of liquid savings (compensating factor), an asset depletion program may be available. (A formula is used to arrive at an income based on liquid savings accounts and life expectancy.)
Debt ratios—a debt ratio is total debt, including mortgage, divided by income. Lenders usually have a 45 percent total ratio and may go up to 50 percent, depending on the financial situation. You may get an online approval, but keep in mind that the following items may not have been put into the online application and may be picked up in a later underwriting, pushing the debt ratio up and invalidating the approval. Items such as: (1) Private loans that need to be disclosed (the lender may see a payment on a bank statement checking account and ask what it is. Surprise— it’s a loan payment on a private note. (2) A new car lease. The old one was replaced with a much-higher new payment and, voila!—higher debt ratio. (3) You cosigned on a loan after you applied and the lender picked up on it with a credit repull later on. (4) A vacation home without a mortgage—so, “who needed to put that on the application?” You did, because they count the taxes and insurance in the debt ratio (5) Rates moved higher and you didn’t lock in. Guess what? Up, up and away… higher debt ratio. Well, you get the idea.
Assets—Seasoning means you need to have the cash in your account for generally two months. You entered that you have $400,000 in cash in the asset section of the online application, but it’s in your mattress and…. mattress cash is a NO GO! Gifts are good but have to be paper trailed. You won a lawsuit and are expecting big bucks (but you don’t know when). Make sure you are close to having it in hand before going to contract, unless the seller can wait a couple of years to close.
Credit—You were approved on a low credit score, but your credit improved. Is anyone calling you to tell you that you may get a better rate now? You were approved on a 760 score, but now you had your identity stolen and your credit dropped. Which customer service rep, in what bank, on that quick approval, is helping you out on this one? I don’t know either.
Rate—If you make big bucks you may be immune to market volatility and increased rates or the higher qualifying rate used on adjustable rate mortgages, but if you are borderline and just made it by the skin of your teeth, you need rate advice and protection from day one. Online approval qualified you at 3.5 percent, but now rates are 4 percent and no one told you to lock the rate and protect it. There are choices and the mortgage professionals know them, but how about Mr. Online Rep? I don’t think so.
Programs—Lotsa rates, lotsa programs, lotsa different underwriting guidelines. Do you take a conventional, FHA, VA, Fannie Mae, Freddie Mac, high balance, jumbo, super jumbo, construction, 203k, homestyle, stated, 3 percent down, 5 percent down, 10 percent down, 1st and 2nd piggyback, lender-paid mortgage insurance, monthly mortgage insurance, asset depletion, reverse? Closing costs or no closing costs? How do you get the best rate? Hey, Mr. Computer, talk to me… What? I can’t heeeearrr you.
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. a Zillow 5-star lender http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y. He is a residential and reverse mortgage financing expert and a dealmaker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation, and his advice will save you thousands! www.greenbackcapital.com [email protected]
By Carl Guzman, CPA
