In today’s challenging and uncertain lending environment, qualifying standards for home loans and refinancing are becoming increasingly more stringent. Many potential borrowers who were “pre-approved” under yesterday’s loan underwriting guidelines may discover that their loan program qualifying standards have changed or the loan program is no longer available.
Unfortunately, some unwary prospective homebuyers discover they cannot meet the revised underwriting criteria when they are in escrow waiting for the lender to fund the loan to complete their purchase transaction. The loan documents sometimes will arrive just a few days prior to the scheduled closing date with different loan terms and/or “prior-to-funding” conditions of which the borrower cannot comply.
Here are some tips to protect your transaction from the dreaded last minute failure due to unfulfilled financing to complete the purchase:
- 25 day maximum close of escrow deadline falls within the premium (least expensive) loan interest rate lock period and will avoid changing loan underwriting guidelines
- Seller to insert a contingency clause into the purchase agreement “Buyer shall lock in loan interest rate within 24 hours of acceptance”
- Buyers- demand that your Financing and Appraisal Contingencies remain in place until funding of the loan (usually the day before or day of close of escrow) to protect your good-faith earnest money deposit from forfeiture to the Seller
- Sellers- instead of requiring the entire Financing Contingency removal in advance of the loan funding- insert a contingency clause that requires the Buyer to provide written evidence directly from the bank underwriter of full loan approval with all conditions met (within reason), verification of employment, down payment monies and a complete sign off of the appraisal report. The only item remaining to complete the financing are delivery of the loan documents and loan funds to the title company escrow account
- For occupied properties, ALWAYS include a rent-back option in favor of the tenant or seller in the event there is a delay or worse, a cancellation of the sale due to financing problems. There is nothing worse than contacting the Seller that the deal is dead after they have moved out or all of their possessions are packed.
Many Sellers of occupied properties are buying and moving into another home and these suggested precautions can mitigate the pitfalls of these uncertain times in the lending arena.
BEWARE of using a Mortgage Broker to obtain financing. Direct lenders (banks) are closing their wholesale lending departments or eliminating the majority of Mortgage Brokers who fall outside of their performance requirements.
Additionally, Congress is likely to eliminate the Yield Spread Premiums (YSP) that Mortgage Brokers need to be competitive in loan costs to the borrower. Loan programs are being eliminated or modified on a consistent basis and many Mortgage Brokers are not in the direct line of communication when banks issue these memos to their in-house lending divisions.
Therefore, Mortgage Brokers are at a disadvantage in this tough lending environment. Don’t take unnecessary chances with your transaction. Use a direct lender such as a major bank, credit union or mortgage banker.
Sellers- if the Buyer insists on using a Mortgage Broker, insert a contingency clause into the purchase agreement “Within 3 days after acceptance, Buyer shall provide Seller a letter from a direct lender (Bank or Mortgage Banker) stating that upon review of Buyer’s written application and credit report, Buyer is pre-approved for the new loan stated and Buyer hereby agrees to accept the best available loan from either Direct Lender or Mortgage Broker at close of escrow”.