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Protect Your Transaction From the Number One Deal Killer...

By
Real Estate Agent with Compass 00889760

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".

 

Matt Ratcliffe, REALTOR
Keller Williams Realty Brazos Valley - College Station, TX
You are right on about your choices.  keep up all the good work and keep them coming.
Jan 28, 2008 01:05 PM
Nina Gail Betancourt Morgan
NatureWise Realty - Evans, GA
From Waterfront to Mountaintop
Just heard of 2 instances where appraisal values were cut by 20% prior to closing due to "declining market". One buyer lost $10,000 deposit!!
Jan 28, 2008 01:06 PM
Pete Sabine
Compass - Lafayette, CA
San Francisco Bay Area Real Estate

"Just heard of 2 instances where appraisal values were cut by 20% prior to closing due to "declining market". One buyer lost $10,000 deposit!!"  - NinaGail Betancourt

Hi NinaGail, in California, most loan underwriters will not accept appraisal reports if the box "stable market conditions" is checked. Therefore, appraisers are now checking the "declining market conditions" box on the appraisal report. This requires the appraiser to include 3 active listings in addition to the recently sold comparable sale listings. Many appraisers are taking the average value of 3 similar active listings and subtracting at least 5% from the average. This sum is then blended in with the weighted averages from the sold comparable listings on the report.

Its tough to get a loan through underwriting under these conditions. The best you can hope for is a buyer with at least 20% to take some of the risk out of the underwriting evaluation.

Pete Sabine

ContraCostaLiving.com

Jan 29, 2008 10:07 AM
Karen Kruschka
RE/MAX Executives - Woodbridge, VA
- "My Experience Isn't Expensive - It's PRICELESS"
Pete,  Nothing that happens today makes me perform any differently than I have over the past 31 years - I guess that is why my husband and I have a 100% closure rate on more than 1500 transactions.
Jan 29, 2008 10:24 AM
Pete Sabine
Compass - Lafayette, CA
San Francisco Bay Area Real Estate

"Pete,  Nothing that happens today makes me perform any differently than I have over the past 31 years - I guess that is why my husband and I have a 100% closure rate on more than 1500 transactions."  - Karen Kruschka

Hi Karen, its great that you are a proven professional with a perfect closing record. I bet you already know about these recent changes in lending guidlelines for "declining markets":

...Here are some tips I learned from a seasoned California mortgage banker who successfully funded over 100 loans during the tough transitional 2007 real estate market. These tales from the trenches can prevent your deal from the shrapnel of a loan decline or last minute tighter "prior to document or funding" conditions:

  • Most conventional (up to $417k) and non-conforming (Jumbo) loans above $417k require Desktop Underwriting approval
  • Conventional secondary financing is very difficult to obtain. A maximum of 90% loan-to-value (LTV) ratio should be relied upon from the buyer
  • Jumbo interest rates are currently at least 1.375% higher than conforming loan interest rates
  • Secondary "seller carry-back" financing is a great sales tool strategy. In some cases 100% total loan-to-value will be allowed with the first loan at 80% LTV or less
  • Beware of "declining market" underwriting guidelines -
    • A 5% reduction on the guideline is required by most lenders, so if the buyer is applying for an 80/10/10 loan, the underwriting guideline would have to meet or exceed 85/15/5 underwriting guidelines
    • Be sure to work out these important details in advance during the loan "pre-approval" stage instead of in the middle of a transaction!
    • All of California is now considered to be in a "declining market"- check with your lender to see how your local market is rated
  • Credit scores of less than 620 will not pass
  • Appraisal reports are submitted to underwriting
    • Underwriting runs an Automated Value (AVM) which almost always comes in low
    • Desk/Field appraisal review is then ordered
    • Make sure the appraisal is always signed off by the underwriter within a reasonable amount of time

One more thing...don't forget to wear your flack jacket in this ever changing lending environment. Thanks for commenting on my post.

Pete Sabine

ContraCostaLiving.com

 

Jan 29, 2008 10:49 AM
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI
These are all good tips. The standard sales agreement used by members of our MLS allows the buyer to get the deposit back if the property appraisal does not match the selling price.
Jan 29, 2008 12:34 PM
Christina Bennani-Persechini
Keller Williams Realty Boston North West - Lexington, MA
Realtor - The House For You
Great blog, I am passing it on to my team to review. There are so many land mines to avoid to actually close....
Jan 29, 2008 12:43 PM
Pete Sabine
Compass - Lafayette, CA
San Francisco Bay Area Real Estate

"These are all good tips. The standard sales agreement used by members of our MLS allows the buyer to get the deposit back if the property appraisal does not match the selling price." - Wayne B. Pruner 

Hi Wayne, your standard sales agreement appears to offer good protection for the buyer in the event the appraisal comes in too low...if it does, can the buyer make up the difference in cash?

Pete Sabine

ContraCostaLiving.com

Jan 29, 2008 03:33 PM
Pete Sabine
Compass - Lafayette, CA
San Francisco Bay Area Real Estate

"Great blog, I am passing it on to my team to review. There are so many land mines to avoid to actually close...." - Christina Bennani

Hi Christina, thanks for commenting on my blog. Keep coming back as I have a lot more real estate survival skill secrets to share.

Pete Sabine

ContraCostaLiving.com

Jan 29, 2008 03:36 PM
Don Draughn - Mortgage Professional
High Point, NC
It is a tough market but not all Mortgage Brokers are having difficulty getting loans funded.  We certainly are not. 
Jan 30, 2008 02:34 AM