3 Qualifying Surprises That Home Buyers Can Avoid
You do not want any surprises while you’re in the middle of an escrow on a new home.
Most surprises can be avoided if you are working with a competent lender and real estate agent that made you do all of the hard work before making an offer on the home.
If your home buying team simply pushed you into escrow without preparing you for the trek ahead, you may just as quickly fall out of escrow.
Keep in mind that falling out of escrow doesn’t necessarily mean that you do not qualify to buy a home, it simply means that you may not qualify for the loan that you were initially pre-qualified (not pre-approved) for, and subsequently you may not qualify to purchase this home any longer.
It is an unfortunate and common occurrence that a mortgage lender will shoot from the hip and allow you to make an offer to buy a home without thoroughly reviewing your information.
It’s very easy to “overlook” some of the more unique hurdles that can stop your escrow in it’s tracks.
Let’s explore a few of the most common “Surprises” you do not want to get while in escrow:
Mortgage included in Bankruptcy
When you include a mortgage in a bankruptcy, in almost all cases the lender will stop reporting the mortgage payments to the credit bureaus, and simply report – Included in Bankruptcy.
Where this causes an issue is if a lender glances over the credit report, sees the mortgage included in the discharged bankruptcy, and fails to research or inquire about what happened to that home after the BK.
If the home was eventually foreclosed, or if you did a short sale or deed in lieu of foreclosure, this pushes the “waiting period” out from the time that your name was removed from title, not when the bankruptcy was discharged.
In many of these cases that I’ve seen over the years, the result is that you are simply not in a position to qualify for financing until the waiting period is up. It’s a very simple thing to catch if you’re looking for it, and just plain lazy or incompetent if a lender misses it.
RELATED READING: Mortgage Discharged in Bankruptcy is NOT Free and Clear
Overtime, Bonus, Second Job & Commission Income
Employment and income are very common causes of issues that can result in your qualifying limit being significantly reduced if it’s not caught early in the pre-approval process.
The general underwriting guideline is that you must show a history of receiving “out of the ordinary” income over a 2 year period, and you must document the probability that it will continue.
This is typically done through a VOE, or Verification of Employment. A VOE is sent to your Employer(s) to breakdown where your income is paid, how long you have been paid this way, and whether or not there is a probability of continuation.
It is also likely that your lender will have to order Tax Transcripts (if you signed a 4506T authorization form), to cross reference your W2, or pay stub income with what was reported to the IRS.
Once a 2 year history of “out of the ordinary” income has been established, it is typically averaged over 2 years. If you receive much higher commission today than you did last year, your qualifying income from commissions will be reduced as it is averaged over the 2 year period.
Bonuses, overtime, commissions or a second job that cannot be documented as having a 2 year history of receipt, may not be able to be used when calculating your qualifying income. I’ve seen this completely kill deals.
Source of Funds to Close
This is a big one that can usually be avoided if you know the best practices for documenting, and in some cases receiving funds to close as a gift.
Funds needed to close are required to be documented that you have had those funds for a minimum of 60 days. If you have not had the money to close for 60 days, there are acceptable, and unacceptable ways to get around this requirement.
If you are using a gift from a relative (either blood or marriage), it must be accompanied by a gift letter and should be wired directly into escrow by the party giving you the gift.
A common, and sometimes troublesome scenario is that a parent will give you the money, and you deposit it into your bank account when escrow opens.
This could cause serious delays, and will be a huge burden on the person giving you the gift as they will be required to document, not only the withdrawal of the funds, but they must then provide 60 days worth of bank statements showing that they have had the money for at least 60 days.
This scenario is rarely a deal killer, but it can be a very stressful and embarrassing situation for the relative to be in, after they’ve already been kind enough to help you out.
Surprises Survival Guide
Avoiding surprises is remarkably easy actually. Take the time to educate yourself about the home buying, and home financing process. Here is a quick list of ways you can survive the home buying process:
- Ask a lot of questions – There is no such thing as a dumb question. Don’t be afraid to ask!
- Do not feel pressured – If you feel pressured by your lender or agent, they are looking at you as a paycheck, not a person.
- Do your homework – There is a TON of information available online that can help you prepare for the home buying process. If you’ve read this far, you’re already off to a great start!
If you would like to get started with #1 now, simply ask a question, or leave a comment below, shoot me an email or give us a call. Education is empowerment, and you’re already most of the way there!