In Part 1, I explained what underwriting conditions were and how some conditions can be good and pretty standard and easy to fulfill. Some can be bad and a challenge to fulfill and others are just downright ugly and are either impossible to fulfill or just basically nonsense.
Adding to the challenge, different lenders may have different conditions based on their specific lender overlays. The same can be said of different programs that will have different conditions however the differences between conventional and government programs are becoming fewer and fewer all the time.
There are several areas of the transaction that can be a source of grief when it comes to conditions; way too many to list in this post. Whether it's verifying assets or income or some other aspect of the loan application, conditions can go from good to bad to ugly without the proper documentation.
For example, when verifying that a borrower has the funds to close escrow, all funds must be sourced, documented and verified, in other words, a paper trail must be established. Below are just some examples of how the verification of funds to close can wreak havoc on the loan transaction because of documentation, or lack thereof.
GOOD: At least 90 days of bank statements with sufficient funds that have been adequately seasoned in the borrowers account in accordance with program and lender guidelines. There are no unusually large, non-taxable deposits that need to be explained and neither the earnest money deposit nor any of the funds needed to close are derived from a loan or are being withdrawn from any open lines of credit.
BAD: Funds have not been adequately seasoned in the borrowers account. If funds are coming in the form of a gift, the gift donors funds need to be sourced and documented and the transfer from the gift donors account to the borrowers account need to be documented and verified.
If the funds are coming from another asset account (401k, retirement, brokerage, stocks/bonds, etc...), the funds from that account need to be sourced and documented and the transfer from one account to another must be documented and verified.
UGLY: Large cash deposits from non-payroll sources of income are some of the most challenging funds to explain. If funds are being derived from the sale of personal possessions, sales receipts of the sold items are required. Most lenders will not accept cash on hand and for the few that do, there will definitely be restrictions on how much can be used for qualifying purposes.
At any time during this process, if the documentation is even slightly out of whack, this can cause delays in the loan transaction. If the gift funds are from an ineligible source or worse, can't be sourced, that will disqualify the gift funds. If large cash deposits can not be explained, then those funds may be disqualified. I recently, had a loan transaction that got delayed because my client had large cash deposits.
My client's bank statements reflected some large, non-taxable, cash deposits. This was an FHA loan transaction and in accordance with FHA guidelines, we are required to only provide an explanation if the deposits exceed 2% of the property sales price, which these deposits didn't and if a loan had been incurred to obtain the cash, which it wasn't. We, of course, verified and documented this info.
This particular lending source had a lender overlay that required an explanation of any non-taxable, cash deposit exceeding $600 regardless of the sales price and/or source of funds.
At this point, we provided an LOE explaining that my client had sold some personal possessions and we listed the possessions. Additionally, we provided sales receipts (that included buyer's contact info, the sales amount and date) for the items that were sold for more than $600.
Then the transaction went from bad to ugly when the underwriter required that my client provide proof of ownership for the items he sold. This was impossible because all of the items were either things that my client received as a gifts (over a lifetime) or items that he purchased for cash from private parties.
One particular item was a drum set that my client received as a gift from his parents when he was a teenager (my client was 25). Other items were furniture that my client received from various relatives when he left home a few years earlier. The other items were things that he purchased from craigslist for cash. For anyone who has ever used craigslist, most sellers are private parties selling for cash only and they provide no receipts.
To wrap up this story, I escalated the matter to management and filed a formal complaint about the underwriter (I'd been having problems with this underwriter from the get-go). Management waived the condition for proof of ownership and we received a clear to close approval.
There are so many ways a loan transaction can be delayed because of some PTD or PTF condition. Conditions can go from good to bad to ugly at any point, with no explanation regardless of program and/or lender guidelines. Lenders are not in the tree saving business and as such, some lenders will require a paper trail for just about everything that you can possibly think of.
Inexperienced, incompetent and/or irrational underwriters can also derail the transaction when they start requesting things that aren't even required by the lender. In those instances, this is where an experienced and competent loan officer (LO) can take control of the situation and can either escalate the matter to management or find another lending source (a last resort).
Stay tuned for Part 3 where I discuss other types of underwriting conditions that can delay a loan transaction and how to avoid these complications. In the meantime, check out Part 1.
THE GOOD, THE BAD AND THE UGLY: Underwriting Conditions Gone Crazy - Part 1
THE GOOD, THE BAD & THE UGLY: Underwriting Conditions Gone Crazy - Part 3
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