Contract to Close: Obtaining Mortgage Financing and Credit Monitoring
Many agents have stories of deals falling through because their buyer client did not realize that big moves like quitting/changing jobs or making large purchases could negatively affect their credit to the point where their loan was no longer approved. Even if a buyer is confident that they could cover payments for both their mortgage and the new car they consider buying before closing day, it is wise to wait until afterwards in order to not scare the bank.
Between signing a purchase agreement and closing on a home to officially take ownership, another major contingency that needs to be resolved (along with physical inspection and attorney review) is the mortgage contingency. In other words, the bank a buyer is using has to agree to transfer a large amount of money on closing day in order for the seller to give the keys to the buyer.
This goes without saying for most, but in order for the bank to agree to give up such a large amount of money it has to have an agreement in place to receive those funds back from the buyer over time (mortgage). The agreed upon interest allows the bank to make money of this arrangement.
If for some reason the buyer is not able to make progress on paying back the borrowed money as arranged, the bank has legal means to take possession of the home and sell it in order to recover its investment. However, sometimes this doesn’t work (property value may have dropped) and banks don’t usually prefer to do this anyway because of the time, effort, and uncertainty involved. For this reason, they want to be confident that the buyer will be able to make payments consistently. This is the purpose of prequalification and preapproval processes earlier in the buying process, but many buyers are not aware that the bank monitors their credit all the way through the day of closing. The amount of debt a buyer carries has a direct impact on their credit.
Though not taking on significantly more debt or giving up income sources might sound like common sense to most people, some studies (I saw one by Transunion) show that the average buyer’s credit card activity rises in the weeks before closing on a home. When one considers that obtaining a home is usually accompanied by buying furniture and other perhaps appliances or other furnishings, it’s easier to understand the temptation. Again, the wise move is usually to wait until after closing day for these purchases.
Finally, if a buyer is receiving significant amounts of money from people like family members in order to help with the purchase, it is best to let their lender know. Otherwise, a lender might suspect that the unexplained increase in their account funds was gained by taking on an additional loan.
Buyers who are unsure of whether a move will jeopardize their mortgage approval should ask their agent and/or their loan officer before pulling the trigger. Some refer to a buyer’s credit as one of the “Three C’s” of mortgage underwriting (along with Capacity and Collateral). More on underwriting to come…