Recently, I closed a sale on a home in Boca Raton where the owner put down 25% and had a credit rating of 720 but my buyer was still put through the ringer so to speak when it came to getting approved. It seemed like it would be a simple transaction. We all thought that a high down payment plus a high credit score would move the process along with no sweat but it did not.
He filed all of the forms his mortgage banker asked for. Two years of tax returns, two months of bank statements, his two latest pay stubs. Everything the bank asked for but you have to remember underwriting guidelines are not always driven by common sense. And the words “due diligence” and “compliance review” can be quite annoying at times especially when they are done at the end of the process which typically there are.
Simple Deposit Becomes Complicated
Naturally, in order to get the house into contract, he gave us a deposit of $1,000, which we put into escrow. That is where one problem started.
The deposit came from his wife’s bank account. He transferred the money to her account because she was here in Boca Raton and he was not, and we needed a check to present to the seller as a show of good faith, but she was not a borrower.
So what’s $1,000 in the grand scheme of things when a Boca homes sells for around $300,000? It seems like 1/3 of 1%. But to the bank, it became a large issue because much of what banks do today is source the funds for the transaction. There are guidelines and laws that have to do with money laundering so every deposit check and most every deposit on a bank account needs to be sourced and explained.
So remember, as you approached time to purchase your next home, DO NOT move your money around between accounts and be prepared to explain all large deposits that are not payroll related. All monies need to come from the borrowers account and no gifts from Aunt Sue or Uncle Bill who are not even related.
Here is an example of bank troubleshooting gone crazy:
Beware of pay stubs with printer’s names on them. Another problem, one that makes us wonder about the people processing these mortgages, had to do with the buyer’s pay stubs.
It seems that the name of the company that prints the checks was at the bottom of the pay stub. This is fairly typical. We have all seen this. Many companies order checks from printers. The printers put their name on the checks as a form of advertising. The letters are usually in 6 or 8 point type and are nowhere near the important information that pay stubs supply.
However, the bank questioned this aspect of the check because it was a paystub that did not give year to date figures and it just so happened that my borrower sometimes was paid in round numbers e.g $250 or $4000 even. That is a red flag to auditors that led to questions. They asked the buyer to explain, in writing, why there was another company’s name on the check in addition to that of his employer. Dumb question yes, but the lenders response was remember the days of Fraud!
One last step that all banks do now is they execute a 4506T form on every file. This form is sent to the IRS to verify the tax returns in file match the ones on record with the IRS. Six years ago this measure was done on 1 out of 10 files as a quality control tactic by wholesalers. Now this form is executed on every single file and if you have no record with the IRS, you have no loan.
Higher mortgage standards make sense. Pursuit of trivial information is foolish.
Fortunately, the loan was approved and the house closed. But proceedings went down to the final minutes of approval time. Even though we had our commitment letter well ahead of time, the package arrived the day before because most lenders manage their pipeline by closing date. Sending a closing package out too early, in their view, just leads to more re-drawing of packages and corrections later and inefficiencies. Plus everybody is so busy with a lot of volume these days, lenders really need to work hard to manage their work flow.
According to my go to banker Preston Ware over at Prestonware.com , you would need to sit behind the scenes for a week to actually learn to appreciate the type of work that goes into each and every file nowadays. And according to him, it is probably better that you don’t know.
I am pleased that banks are applying tougher standards to mortgages. However, it appears that in their zeal to help prevent another housing crisis, they have gone to the opposite extreme. Before 2006, a buyer needed only to show that he was breathing. As a potential buyer be prepared for a grueling process and a few on edge moments but keep in mind that you are not alone.