Let's Play "Connect the Dots"
with your Mortgage!
Questions from Underwriters regarding new accounts, transfers between accounts, and debts pop-up fairly frequently. Clients don't always seem to "connect the dots" between the actions they take ... and the possible consequences they may reap from those actions.
Credit Bureaus are quite a different story. They're sensitive regarding actions and consequences. (Transactions and credit inquiries being just some of them.) If you think they won't notice the actions you've taken, you're wrong. They will ... and as a result, so will Underwriters.
Typically an Underwriter requests an explanation or clarification for changes they see on your Credit Report (at minimum). Worst case scenario? You throw a wrench into your deal by either slowing it down or killing it altogether. It can and has happened.
So to better protect you from suffering these serious consequences during your Mortgage financing ... let's play "Connect the Dots". By presenting scenarios you may run into, I hope you'll remember the message learned from them more easily and be better protected as you move forward.
I'll touch upon the subject of banking accounts, expenditures, purchases, and credit leading up to Mortgage Pre-Qualification, at the time of Mortgage Application, during Mortgage Processing, and through to Mortgage Closing.
The scenarios presented below should be of concern to all potential Home Buyers and those thinking of Refinancing. Why? Because they are to the Underwriters considering your application for approval.
Let's Play "Connect the Dots"
with your Mortgage Process!
Connect the Dot #1: Funds for Closing
Actions: You transfer money between banks or banking accounts. Or you make large and frequent (excessive) deposits in an account.
Reaction: An Underwriter red flags these actions and asks you to clarify the transfer(s) and deposit(s). They also ask that you document where the money came from.
How to avoid this Underwriting red flag: Avoid moving monies (as much as possible) during every phase of your Mortgage Process, otherwise you'll
have to explain your actions with a Letter of Explanation and possibly have to provide documentation to back your explanation up.
To handle this issue best: Collect the money needed for Down Payment and Mortgage Closing costs in one (1) account. If possible, operate your personal bill paying from one separate checking account. It'll make life easier during the Underwriter's review.
Connect the Dot #2: Earnest Money
Action: You pay cash for the Earnest Money needed for your purchase.
Reaction: The Underwriter's red flag pop-up on this. They need to verify that your Earnest Money is NOT tied to new/more debt, such as a loan or credit card advance. They'll also want to know if the money is considered a gift.
Earnest Money is a Buyer's commitment to proceed with a Contract, once the Sellers have accepted your offer. It's also considered a part of your Down Payment, so it's importance within your transaction can't be underestimated.
Any client offering cash as their Earnest Money will need to explain where that cash came from ... and then provide documentation to prove it. Underwriter's have to "connect the dots" too.
Any client offering cash as their Earnest Money will need to explain where that cash came from ... and then provide documentation to prove it. Underwriter's have to "connect the dots" too.
How to avoid this Underwriting red flag: When providing your Earnest Money, write a personal check or get a bank check from the account you plan on using for the remaining portion of the down payment needed, if possible.
Note: Should any of the money for Down Payment be a Gift, the Underwriter will want to make sure that the money received is not tied to any expectations of repayment.
As the Borrower: Be prepared to fully explain and document proof of any gift to an Underwriter. For the Donor(s) providing the gift: You may be asked to explain and document the gift monies as well.
So Borrowers, please make sure all Donors are aware of this need/request ahead of time and are onboard with providing answers and documentation to fully address the Underwriter requests. (See Below)
Connect the Dot #3: How to Handle the receipt and giving of Gift Money
Action: A large amount of gift money is received by the Borrower for use as Down Payment or Closing Funds for their mortgage.
Reaction: (As above noted) The Underwriter demands a full disclosure of the gift and proof of such by the Borrower and the Donor.
How to satisfy the requirement raised by the Underwriter about the Gift Money:
Gift Money is completely acceptable as a source of Down Payment or Earnest Monies. But specific guidelines are in place as to how to successfully satisfy the Underwriter's concerns and requests regarding those gift monies.
Depending on the nature of the Loan Type (FHA, Conventional, VA, USDA, etc.) the paper trail process to satisfy the Underwriter can vary. It would be nearly impossible to cover all the variables possible here.
Essentially, the following is what typically has to be addressed when Gift Money/Funds are involved within a transaction:
- A Gift Letter must be prepared and signed by the Borrower AND the Donor.
- The Gift Letter must detail the amount of the gift
- The Gift Letter must show/prove what type of account the Donor is gifting from.
- The Gift Check SHOULD be prepared PRIOR to Closing and PRIOR to Underwriting of the loan.
- Ideally, the Gift Check IDEALLY is given as a Cashier's Check for the amount matching the Gift Letter ... and made payable to the Borrower(s).
- A letter from the DONOR'S BANK must accompany the Gift Check.
- The letter must state that the Gift Check was drawn from an account held by the Donor. (A copy of the Cashier's Check will typically satisfy the Underwriter.)
- The Borrower must deposit the Gift Check into their account (the account used to satisfy the Underwriter for acceptable and adequate funds to Close) ... or it may be brought to the Closing (assuming the Gift Check is less than $50,000 and is approved ahead of time by the Underwriter).
Action #1: You're excited about the prospect of having a new home. You have a list a mile long as to all the things you'll need once you get into that new home. New furniture, new carpet, new appliances, decor, and more ... the list gets bigger and bigger and you head off to the stores. You charge here. You charge there. You also open-up a new charge.
Action #2: The new home you're looking at is an additional half-hour to work versus you're present location. Your present car has lots of miles on it, so you head to the car dealership. Better to do it now so you're ready when you move, right??
Reaction: As I promised it would be, an updated Credit Report is run just prior to your Mortgage Closing. My Loan Processor and the Underwriter go nuts, as your Credit Report now shows a new car loan ... new credit card ... and the higher balances on your credit cards. These new purchases and credit throw those debt ratios I talked to you about at the time of your Mortgage Application completely askew and jeopardizes your Closing and entire transaction.
How to avoid this Red Flag and Underwriting problem: Do NOT head to the stores and charge items PRIOR to your Closing without talking to me (your Mortgage Lender) first. Do NOT go out and buy a new car PRIOR to checking with me first. Do NOT move funds/money, make large deposits, accept gifts, cash-in retirement funds, or etc. PRIOR to talking to me.
First, you and I must analyze whether your debt ratios can handle those expenditures and larger debt. Together, we must make sure that account balances and transfers are handled correctly and in the best time frame for your transaction and financing.
By taking these measures, we make sure that your Mortgage Processing moves as quickly and smoothly as possible. We also ensure that you are not jeopardizing your home purchase or refinance.
Remembering and understanding all the rules above? It can be hard, no doubt about it. But remembering just one rule is simple: Communicate with me and ask questions PRIOR to taking ANY action. If you can "Connect the Dot" regarding that and follow my advice, all the rest will be easier ...
* Hoping to Buy a Home or Refinance in New Lenox, Will County, or elsewhere in the Chicagoland region? Contact me today! I'll put my 37 years of mortgage experience and expertise hard to work on your behalf.
I can be easily found at:
Direct: 815.524.2280
Cell/Text: 708.921.6331
eFax: 815.524.2281
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