Loan approvals come with conditions attached
Don't remove financing contingency if you have any doubts
By Dian Hymer
At the beginning of the year, a rumor was circulating that mortgage lenders were going to ease up on their stringent qualifying requirements, making it easier for buyers to buy and helping the housing market improve.
So far, that rumor has not been confirmed. If anything, the approval process has become more laborious. The home-sale market improved recently, resulting in significant lender backlog in underwriting and funding loans.
Many buyers haven't been able to remove their financing contingencies on time. A request for an extension of time from the sellers is common. Disgruntled sellers often don't understand why qualified buyers can't remove their financing contingency on time.
A delay can occur because the buyers and sellers negotiate on inspection-related defects. It can take a few days to a week for the parties to agree. The negotiations can result in a lower purchase price or a cash credit to be applied to the buyers' closing costs in consideration for the buyers taking care of the defects after closing.
In this case, an addendum to the purchase contract reflecting the credit or price reduction goes to the buyers' lender for underwriting approval. Often, the buyers' loan is already in underwriting at this point.
Any change to the contract that needs underwriting approval can move the buyers' loan package back to the end of the underwriting queue. This can delay final loan approval.
Setbacks at the approval stage can result in a delay in closing if there isn't enough time built into the contract between the deadline for the financing contingency and the closing date.
Most lenders issue loan approval with conditions attached. These will need to be satisfied and approved by underwriting before the lender will issue the loan documents that the buyers need to close the sale.
HOUSE HUNTING TIP: Make sure that you have no doubt about your ability to satisfy the lender's conditions before removing the financing contingency.
Last year buyers that were in contract to buy a home in Berkeley, Calif., were told by their lender that they could remove their loan contingency, which they did. A week or so later, the lender told the buyers that they didn't have a loan.
Fortunately, the sellers in this situation were accommodating. They agreed to an extension of closing date. The loan was reworked, approved and the deal closed. If it hadn't, the buyers' deposit would have been at risk because they had, based on the lender's say-so, removed all contingencies from the contract.
Frustration on the part of everyone involved typifies the homebuying experience in today's picked-up market if the purchase requires a new mortgage. Will lending conditions improve soon? Although a few lenders are lightening up a little, most lenders aren't confident enough that the current homebuying activity is sustainable. So, they're unlikely to ease up on underwriting requirements or hire additional employees to make the approval process move more smoothly.
The loans that are the easiest to process are the conforming loans from Fannie Mae, Freddie Mac or FHA. The conforming loan market has guidelines so there is more consistency in underwriting and loans are approved more routinely. These loans are available only in amounts up to $417,000, or $625,500 in high-priced areas.
Jumbo loans are available for homebuyers who need to borrow more. These loans require buyers to jump through qualification hoops. Two appraisals are sometimes required. There are more layers of underwriting, investor approval is often required and there is less consistency in terms on underwriting guidelines.
THE CLOSING: It's always best to work with an experienced loan professional. It can make a world of difference with jumbo loans if you work with someone who knows how to package your financial documentation in order to receive approval.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."
Copyright 2012 Dian Hymer