There isn’t anything fun about applying for a mortgage – except for the part where you close and it’s over.
The process is inefficient. The whole thing takes too damn long. And the amount of documentation they ask for could keep a small house warm in the middle of winter if you slowly burn the pages in a fireplace.
There are some situations that require an even more absurd level of documentation. For instance, a self-employed borrower who has a greater than 25% stake in multiple corporations would likely have to provide corporate tax returns for each company for at least the most recent 2 years of filings. On top of that, they might have to produce year-to-date profit and loss statements for each of those companies along with a letter from their CPA.
I can tell you from experience that it’s stressful to make requests like that. You can’t always predict how someone might react when they’re told to procure a lengthy list of income documents and asset statements that prove the assertions you make in your application. Some people get pissed. Some people become overwhelmed. I’ve even helped people that questioned whether or not becoming a homeowner was worth all the effort it takes to make it through the mortgage process.
I found that providing a logical explanation for why each document was required went a long way toward keeping people focused on the task. They like to understand the “why,” and some loan officers are better than others at communicating and being a calming influence.
I don’t originate mortgages anymore, but from time to time, I still have the chance to be that calming influence for the Espinal Adler team’s clients.
Last week, one of the agents on the team told me about a client he was helping with a purchase. She was in the process of getting divorced. Her husband was buying her out of their marital residence, and she was going to use the money toward the down payment and the closing costs.
Right away I flagged the situation as one that could go off the tracks if this client wasn’t completely prepared for her mortgage process. I was sure that this particular situation would call for significantly more documentation than what was typical. And after getting more details, I realized that the client probably wouldn’t even have the documentation she’d be asked for, at least not yet. It made sense to setup a conference call so we could proactively prepare for the requests that were sure to come.
The first situation that would have to be addressed and documented was the large deposit into a bank account that would arrive shortly after the client’s former spouse bought her out from the marital residence. An underwriter for a mortgage lender is the final decision maker. They approve or decline a file. Whenever they see a large non-payroll deposit on an applicant’s bank statement, they will require that the borrower source and document where that money came from.
In this particular instance, the easiest way to do that is through a fully-executed buyout agreement that specifies A) the amount the vacating spouse shall receive; and B) the spouse getting bought out gets removed from the deed, transferring ownership rights to the property solely to our clients former spouse and releasing the bought out spouse from any debt obligation associated with the former marital residence. (all of this is a lot cleaner if the buyout happens simultaneously with a refinance of any existing mortgage in place).
The client was not at all aware that they’d need to produce a buyout agreement. Certainly, at that point, there were no specific plans to draw one up because it was more likely to appear in a section of her divorce decree, which opened up a new can of night crawlers.
The divorce wasn’t finalized yet. Everything was in the works, with arrangements being handled by a mediator.
As soon as the underwriter sees that this is a divorce situation, I told the client, they’ll ask for a copy of the entire recorded divorce decree, even if it’s a hundred pages long. Asking for a document like that is probably one of the more uncomfortable requests a loan officer has to make. Not only is it longer than a novel, divorce decrees and separation agreements are filled with the most personal information imaginable. It’s incredibly invasive.
But in this situation, comfort level took a back seat to the fact that the divorce decree hadn’t even been finalized, which potentially could have been problematic. It’s even possible she might never receive final loan approval until she could produce the document or something else that would satisfy the underwriter.
I knew it was an appropriate time to explain the “why.”
First – the background: Every mortgage applicant is assessed based on the risk they represent for paying back the money they intend to borrow. Really, there are three components to the application that a borrower is in control of.
- Credit profile. Has the applicant demonstrated an ability to consistently pay back debt in the past?
- Assets. Can the applicant document that they have enough money to make a down payment, pay for closing costs, and meet any post-closing reserve requirements a lender might enforce.
- Ability to Repay. Of the 3 components, most would agree that this is the most important. A buyer must prove they can afford to make the projected mortgage payment associated with their application. An underwriter does this by calculating the applicant’s debt-to-income ratio (DTI). It’s a simple equation. They’ll divide the projected housing payment, along with any other recurring monthly obligations that show up on a credit report into the applicant’s gross monthly income. For the most part, they want to verify that the monthly debt obligations amount to something less than 45% of gross monthly income.
Then – the logic: Without a divorce decree that outlines exactly how much an applicant is receives (or pays) in separate maintenance and/or child support, the underwriter cannot even quantify the total debt-to-income ratio. It’s an incomplete application.
I was calm. The logical explanation was appreciated. We proactively addressed some issues that otherwise might have come up weeks after the client was in contract to purchase a property. We formulated a plan and made a bullet-pointed list of items that would be needed, and questions that should be asked (to the Loan officer, the divorce mediator, and the real estate attorney).
There was work to be done. But there was a plan in place. For everyone involved, this provided additional peace of mind.