Buried deep within my application paperwork is a form. I refer to it as my "Don't Do Anything Silly" form.
The form reminds my clients not to make any changes in their financial picture that can affect their loan and their ability to be approved.
That's just common sense you might say. What many people don't realize is that until the mortgage loan closes, their finances and how they use them are being scrutinized. I have had more than one borrower, once approved think that they are through the maze, so don't have to pay particular attention to how they manage their money.
What am I talking about? During the loan process credit can be pulled at the beginning and at the end of mortgage loan submission. Lenders are very careful about what is known as "debt ratio". What the debt ratio is, is the percentage of income that is required to satisfy accrued consumer debt including the new house payment.
Let me give you an example: Once a long time ago I was working with a client who had a very high debt ratio. It was tight enough that adding to credit card balances or taking out new accounts would put the debt ratio over the limits allowed by lending. The client was excited-he was building a new home and of course with a new home, there are items that need to be purchased that might not be needed in an older existing home such as window blinds, landscaping, a fence for the dog etc. My client was savvy enough to know he shouldn't charge up any more items on his credit card. However, what he didn't realize was that prior to closing we are required by the lender to do a verification of his bank accounts. The reason is to ensure that the borrower still has the money to close in his account. Upon doing that verification we discovered that the client had taken out a bank loan to cover the items that he wanted in his home the day he moved in. That loan put his debt ratio over the limits allowed by the lender. Two days before closing the loan was denied-Big Oops! The situation was resolved by a cash infusion from mom and dad-but still not a comfortable conversation to have with a borrower that thinks he is moving into a new home.
It is also advisable to keep your job. In the past I have had clients who quit their jobs a day or two prior to closing thinking that the verifications have been made and the lender won't find out. One of the last things that a lender does prior to releasing the mortgage money to the title company is a final employment verification. After the bad old days prior to 2008, lenders want their borrowers to be employed on the day of closing-and the day after closing. Some check the day after closing as well.
We have also had borrowers who were laid off their jobs. While that is not under the borrower's control-the lender is still going to require that they be employed to close the loan.
The other employment issue that occurs from time to time is a job offer for a better position in the middle of loan processing. I would never suggest that someone turn down a chance to better their financial situation but it is important to realize that a job change to a new company can impact the loan. What happens is that all probationary periods have to be fulfilled and thirty days of income must be received prior to closing. So while the borrower will still be able to close, the closing may be delayed.
Another concern that can occur with a job change is whether or not the borrower was approved for their loan using overtime, commission, or bonus income. The rules are that overtime, commission, and bonus have to be earned over a two year period in order to count as income. So any change in company will throw the borrower back to the beginning of the two year window. In fact, it has happened that we once had a borrower who left his job for two weeks, returned to the same job, and then bought a home. His qualification for the purchase price was based on his overtime. We didn't know that he had left for two weeks in the past year. But when we did the verification of employment the brief interruption was noted. He was not allowed to use overtime to qualify for the loan even though he was with the same long term employer. Fortunately, his spouse was able to be added to the loan and he was able to close with the addition of her income.
Last but not least I would encourage folks who are in the mortgage process NOT to spend the down payment money on other items. It is critical that you have the amount you need to close the loan in your account within a few days of closing. You can't spend it, have mom and dad replace it and then proceed without triggering a mountain of red tape and paper trailing. If mom and dad are going to buy you new appliances-let them put it on their credit card or write the check at the appliance store.
In a similar fashion to trying to sell a home-the adage being that you don't live in a home you are trying to sell the same way you normally live in a home-you have to be keenly aware of how you use your money and credit during the period your mortgage loan is being processed. I absolutely hate calling a borrower to tell them that I hope they really like the new SUV they just bought and I hope it has two bedrooms and a bathroom because they most likely will be living in it since the new car payment killed their mortgage loan.
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