Top 5 Real Estate Loan Killers
When a buyer first approaches me and tell me they want to start looking for property, I have a “buyer questionnaire” that I run through with them. I take the usual info down… Name, contact details, current living situation, motivation and time frame. I also ask if they intend to use financing for the purchase and if that would be private or regular financing. Next question is whether they have a lender they are working with or if they would like a recommendation for a couple of local lenders that I trust to treat them well.
We are aiming to get the buyer pre-qualified before we start looking at properties. Why? So that no-one is having their time wasted and so the buyer is very aware of what they can qualify to buy and can then make a better decision about the price range they are comfortable looking in. Aside from that, a conversation with a lender will reinforce many of the things I, the Realtor, am also going to tell them. Nothing could be sadder than an exuberant buyer with a house under contract who learns they cannot buy said house after all. 🙁
I know what you are thinking. the buyer is pre-qualified, they beat out 5 other pre-qualified buyers to win the contract… It’s all downhill to closing, right? Maybe. Maybe not. Here is my list of 5 real estate loan killers:
Real Estate Loan Killer #1: Appraiser determines the house to be uninhabitable
No, this does not just pertain to the house that got ransacked by the angry foreclosed-upon family. Appraisers are going to make sure that there is a working kitchen. The pipes must be intact and water able to be turned on. If the sink is missing – it’s not going to pass appraisal. If the seller is not going to help with this before closing, the buyer is not going to get their loan approved by the underwriter. Many people ask me “so, if I put in a sink before closing, would that satisfy the appraiser?” Yes. But I never recommend that the buyer puts money into a house that they don’t own. Should the deal fall though, the buyer has no recourse for getting back that money. Together we will explore ALL the options the buyer has.
The appraiser will also be checking that there is a source of heat (working), the roof is intact, at least one bathroom is operational.
In an area not far from here, a home is for sale. The MLS comments touch on the fact the house needs a new roof. It states that the Buyer will be responsible for that new roof, Seller is not offering to put the roof on prior to closing. If you are one of those people who skim-read, you might miss the light mention of a blue tarp (which generally indicates the roof is unable to keep the rain out!) Agents are privy to a little more information and further on they are reminded that only a cash buyer will do. This house will not qualify for traditional financing. It’s a tough sell. Yes, there are buyers out there with more than $600,000 cash, but now you are looking for one who is also not afraid of a project right after closing and has a direct line to the heavens prior to closing so can put a “good weather” order in too. The buyer pool just shrunk!
Real Estate Loan Killer #2: Failure to appraise for purchase price
In areas where rows of homes are of similar age, size, location and condition, it’s not normally a problem to locate comparable sold properties and use them for determining a list price. The appraiser will probably use the same comps for the appraisal and you can feel fairly secure that there won’t be an appraisal issue. However, in neighborhoods of older homes, where the degree of maintenance and updating is diverse and homes have become more customized in size and charm over the years, it becomes tougher to find “like properties”. And then there are the established neighborhoods where turnover is low and there may not be comparable or less comparable sold properties within a half mile. This forces an appraiser to go outside the area and/or make adjustments for location, age, finishes, size etc. There is a certain degree of discretion being used and the margin of error must also go up. This problem is exacerbated when inventory levels are low like the current real estate market has been experiencing and the number of sold homes in any given month is down.
Speaking of the current market… Along with low inventory we have seen rising prices, a product of the supply & demand imbalance. When prices are rising fast, the comparable sold properties sold for lower than the next one is under contract for. An appraiser using the “rear view mirror” look at the market without taking into account the rising prices that buyers are willing to pay, might appraise a home for less than the purchase price. If the buyer has not got the extra cash to make the difference up at closing and the seller is not willing to renegotiate the purchase price, the buyer may have to terminate the deal. (Ask me about alternatives to letting the house of your dreams go… I have creative ways to hold a deal together in situations such as this).
Real Estate Loan Killer #3: Failure for buyer to meet loan conditions
Getting a loan is an intimate affair. Be prepared for the lender (or the underwriter) to ask you about certain deposits and withdrawals, late payments, your income sources and that pesky Nordstrom Rack credit card that just seems to charge itself. They may need your tax preparer, your employer, your business partners or your mom to write verification letters. You will be chasing your tail in search of receipts, pay stubs, tax returns and more. It will seem endless, pointless and stressful at times, but it’s the means to an end. Keep your eye on the end goal (the house) and remember that if you fail to provide documentation and verification when asked you will at the very least delay closing… But you may also find this lack of cooperation is one of the great 5 real estate loan destroyers.
What I can tell you now is that you can start getting most of this stuff together before you even find the house and put it under contract. Do your taxes on time and keep copies of the tax returns! Keep copies of your pay stubs, bank account statements and other bits and bobs relating to your income. Pay credit cards on time, bills on time, your current mortgage on time. Getting divorced? Now that’s a real estate loan killer! Read this first.
Real Estate Loan Killer #4: Buyer loses job prior to securing loan
Sometimes bad things happen to good people. Unforeseen job losses are unfortunate and can change your ability to qualify for a mortgage between when you first applied and now, just before closing. We have a Loan Conditions Deadline in the contract to protect you. If you lose your job and therefore your ability to qualify for a mortgage, we simply terminate the contract to buy and walk away with your deposit intact. (Real estate loan killers are OK, if they are your choice, our control.)
Also remember that changes to your current job or the way you are paid, may jeopardize your ability to qualify. If offered a fantastic chance to change from a salary only position, to low base salary and tremendous commission potential, thank your thoughtful boss and tell them you would be delighted with the new arrangement – AFTER you close on your new house. A salary drop may change your income to debt ratio adversely and commission income, no matter how big, needs a two year history before it can be counted on. If in doubt, call myself or your lender or both, prior to committing to any income changes while under contract to buy.
Real Estate Loan Killer #5: Buyer increases their debt prior to securing loan
Ok, so you are under contract and the house is big – bigger than where you are now. How the heck are you going to be able to furnish the place in time for the in-laws visit just after closing? Great idea! Head to Furniture Row (or similar) and take advantage of their 0% interest for 5 years, credit card deal. ……..Oh, no! Don’t do it!
Whatever you do, between contract and closing, it’s not allowed to include large purchases. Buying a new car for the new commute, kitting out the fancy big living room with a super widescreen TV, ordering “big girl” bedroom furniture for your daughters new room or anything else that requires a chunk of cash or a payment plan or a new line of credit to be opened, must wait til after closing. Take a deep breath. I know you are excited, but nothing kills excitement like failing to qualify for the loan you thought you had in the bag already.
Your lender will be pulling your credit a week or so before closing. If your credit score has dropped enough, you might not qualify for the sweet interest rate you previously locked in. If you have been on a spending spree your debt to income ratio might have become the ultimate real estate loan destroyer! Just be aware… Its not a done deal til closing!
We are team. From start to finish, your lender, yourself and I will be in constant communication. Take advantage of the combined experience, knowledge and availability that your lender and SILVER FERN HOMES offers.
No questions are silly questions and together there is no hurdle we can’t overcome… If we hear about the situation early enough! 🙂