No matter if you are a first time buyer or have owned 10 homes, with the ever-changing landscape of the lending world it is hard to keep up with how the home-buying process works. It seems to change on almost a weekly basis! One aspect that I think the majority of buyers are unprepared for are all the requirements and restrictions that the lenders currently have to adhere to. I find clients becoming frustrated as we get closer to closing and the lender keeps asking them for additional documentation, further explanations, and more and more copies of things.
So, in light of that, I want to provide a few notes on what to expect, a few key DO’s and DON’Ts, and generally help set the expectations realistically up front so that you aren’t frustrated down the road. I promise that the lenders are not requiring all these things arbitrarily! In most cases they are federally mandated to do so, and as annoying or redundant as it may seem, it is genuinely just part of the process to qualify for a loan in these crazy times.
The state of the lending industry and new Federal laws are making this much harder than it used to be! Here is an important point that will he help you through this process: Do not try to use common sense to understand this process, there is absolutely none of that in the lending industry at the moment. The mantra is “rules over risk” which means that they are not concerned whether your loan represents a risk or not, it is all about whether you are able to meet their guidelines.
The lender is going to ask you for a whole list of financial documents, ranging from tax returns to pay slips to bank statements. There is no getting around this: they must have all of them, and you need to get them to the lender ASAP after going under contract. If your closing gets delayed more than a few days (and closings get delayed all the time these days), there is a chance that they will need updated versions of everything.
The lender will have a bunch of documents (like the loan application) that they will need you to sign. Again, do this as soon as they ask and get it back to them quickly.
Once they have all these items, the loan will go into processing. The loan processor acts as a second set of eyes to make sure that they have all the documents and signatures they need. At this point if anything is missing, they will ask you for it.
Once it clears processing, it goes into underwriting. The underwriter has the final say in whether the loan is approved or not. Underwriters have an unpopular but crucial job. They keep lenders in business by ensuring they are complying with the thousands of pages of underwriting guidelines now required. Fannie Mae, Freddie Mac, FHA and VA all have gotten very, very strict.Underwriters have very little leeway to be discretionary with what documentation must be in a loan file. If they do not follow the rules they will lose their jobs. After they review what you have sent to them, they will typically approve the loan with “conditions”. That means that there are additional things that must be satisfied before the loan is fully approved or “cleared to close”.
- One example of a condition might be “a satisfactory appraisal”. If the lender turns in all your documentation, and there is nothing further needed from you, your loan might still be “conditionally approved” until the appraisal comes back for the underwriter to review and approve.
- Another example of a condition might be “explain the $2000 deposit into your checking account last month”. They are not being nosy or difficult, the guidelines clearly state that all large deposits that are not payroll must be explained and proven to be your own money (i.e. “sourced”). This is why we tell you not to move money around or make large deposits without speaking to us first during the loan process.
- Please be aware, that as information comes in regarding the conditions, this could create MORE conditions. For example, let’s say the underwriters ask for the source of a $2000 checking account deposit and you tell them it was transferred in from another savings account that you have. Let’s also assume that you did not provide a copy of that savings account statement in the initial loan submission. They would now have to get a copy of that savings account statement to show the transfer of the $2000 into your checking account from this savings account. Finally, let’s assume that the new Savings account statement shows the $2000 transfer that they needed, but on the same statement there is also a $4000 deposit. Now, the process starts all over again because now they have to “source” the $4000 deposit into your savings account! – That is crazy but it is the current state of the industry. This is also the part of the process that tends to frustrate buyers the most.
- This is where the work you put in up front pays off. If everything was complete in the “Gathering Documents/Processing” stage, then there are typically very few issues as described above. But, if you missed providing information in the beginning there can be a lot of back and forth and that gets stressful as closing starts approaching. When the lender sends you additional items they need from the underwriter, they need those back in 48 hours.
Once the attorney receives the closing package from the lender, they will draft up the final numbers for closing – commonly called the HUD-1 or Settlement Statement. THIS IS THE FORM THAT WILL GIVE YOU THE EXACT AMOUNT OF MONEY YOU NEED TO BRING TO CLOSING AND ALL THE FINAL NUMBERS. The lender cannot provide you with the final amount you need for closing until all the steps prior to this have been completed. Once the attorney/title company gets the Settlement Statement drafted they will send it to the lender to approve and then they will forward that to you for your review.
Now we are ready to close!
The most critical part of this to understand is that it is imperative that you get the lender every single item they ask for, as soon as they ask for it. In addition, ANY changes that are made to either your finances or the contract can mean a delay in the closing due to the need to document everything. So before you make ANY changes, check with your lender or Realtor to determine what the best course of action is.
Some examples I have dealt with of things that will delay closing and require additional documentation from you:
- you open a new account or credit card
- you run up the balance on an existing credit card
- you buy a car or new furniture
- your dad gives you a check for $1000 as a housewarming gift
- you change jobs
- you move money from one account to another
- you make a late payment on an existing account
- you switch an existing account at your bank to a different type of account that has a different account number
- you file your taxes for the year
- your parents pay off your student loans
- you pay off a credit card
- your credit score drops or you have new inquiries on your credit report (which can be from something as simple as applying for financing at Rooms To Go for the new furniture you want, EVEN IF YOU DON’T ACTUALLY BUY ANYTHING)