Getting a mortgage is challenging to begin with. Everything one does between applying for a home loan and closing on one will be watched closely by the bank making the loan. In 14 years of handling residential mortgages for buyers in NYC, I’ve seen it all. Here are some cautionary tales that show just how sensitive the mortgage approval process can be — and how to avoid pitfalls to get through it smoothly.
The RV Guy
Years ago, a client of mine applied for a mortgage to purchase a co-op in the West Village. After his loan was approved, he and some college friends decided to go on a road trip. The best way to do this, they decided, was to buy an RV using my client’s credit, since he had the strongest score. The cost was $2,600 per month; he said his friends were each going to give him $350 per month until it was paid off. But this purchase put his debt-to-income ratio above the approvable limit of 45 percent for the bank, and way over the 28 percent threshold a co-op board allows. The last time we spoke, he was living out of that RV. Don’t be the RV Guy.
The Comic Book Collector
In 2001, the federal government passed the Patriot Act, a portion of which requires banks to source any funds used in a real-estate transaction. One of my clients, during the purchase process, had a pretty significant comic book collection. After his loan was approved, he decided to sell all of his comic books, netting him close to $35,000 in cash (since they were sold to private collectors at comic book shows). The client proceeded to deposit all that $35,000 in cash into his checking account.
Banks require updated asset statements along with pay stubs during and after the approval process, to ensure that all funds have been accounted for and that the borrower is still employed. When we saw the deposit of $35,000, it raised red flags, and caused a huge delay in closing, since the client was unable to document where the funds had come from. If you cannot document the source of funds deposited into your account, you may not use them for any part of the purchase transaction. In this case, comic books were no laughing matter.
The Cupcake Dreamer
After the subprime meltdown of 2008, Congress passed a wide-reaching financial regulation called the Dodd-Frank Act. Part of it is known as ATR, or Ability to Repay, which means that when banks issue a mortgage, they must show proof that the client has the ability, through income, to repay that mortgage. I was recently working with a client who was buying a condo; her loan was approved because she had great credit, excellent income, and a good amount of reserve funds — she was making six figures working for an investment bank on Wall Street.
Every bank that originates mortgages will usually do a final verification of employment within 10 days prior to closing, but when someone on my team called this client’s human resources department to verify, we were shocked to learn that she had resigned from her position as managing director of the investment bank just three days prior. The client told us she thought that once the loan was approved, she could do whatever she wanted — and she’d decided to switch careers and open a cupcake bakery. Now, however, because she no longer had that job income, she was not going to be able to afford the mortgage payment, and she no longer met the Dodd-Frank ATR rule.
You can switch jobs if you’re applying for a mortgage, as long as the new position is in the same line of work and the pay structure is the same — meaning you’re going from one W-2 job to another. If you go from a W-2 job to being self-employed, however, banks will require two years of self-employed tax returns before they can lend to you. Luckily, this client had a brother with the resources to cosign for her mortgage at the last minute. The lesson here is to follow your cupcake dreams — just not right before you close.
I share these stories so that you can avoid being the RV Guy, the Comic Book Collector, or the Cupcake Dreamer during your mortgage process. Stability is key up until the day you close. So remember: If you are going to do anything major with your employment, assets, or purchases while in the loan approval process, give a call to your loan officer first so as not to jeopardize everything.
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