Avoid “The Big Gotcha” When Closing on Your Home Loan

My iPhone rang and on the other end of the phone was one of my clients, distraught, rushing to explain how the buyer (and the buyer’s lender) of her house did not have their cash to close verified yet.  Closing would be delayed, her interest rate would need to be extended, and her blood pressure rocketed while realizing moving plans had to be reconstructed.  Some form of this scenario happens ALL TOO OFTEN in today’s mortgage industry. 

Two reasons why the Big Gotcha happens...
1) Borrowers are not properly educated as to the importance of verifying cash to close and establishing a reasonable timeline. 

2) Today, more than ever, mortgage lenders create a thorough paper trail and document every dollar used in buying and closing on a new home.

The best way to avoid THE BIG GOTCHA is to make a game plan with your lender.  From the beginning, understand the amount of money you need to have verified in your bank account, when the money must be verified, and what documentation is needed for all non-payroll related deposits. 

A checklist to help you avoid delays and surprises…

 
1) Email your lender specifically where your money is coming from for the closing. Use specific dollar amounts if coming from multiple sources.

2) Establish a timeline with your lender on when those funds will be in the main bank account.

3) Request in writing from your lender what documentation will be needed to verify funds.

4) Contact your lender (as many times as necessary) before you move money from one account to another, get a gift for closing funds, sell an asset to another individual for funds to close or liquidate or borrow against a retirement account….yes, PLEASE over communicate!

5) Funds for closing must be wired to the closing agent’s account.  Contact the closing agent for wiring instructions and a time frame for when the wire should be sent.  Typically wiring funds 24 hours in advance is recommended.

Cash to close on the purchase of a new home can come in a variety of ways, including tapping into a 401k, receiving a gift from a family member, a settlement, selling a car, or selling jewelry... just to name a few.  I have even had buyers sell a race horse for funds for closing.

Examples of standard documentation required by a lender…

1) If using equity from sale of current home, please provide copy of closing statement on sale of home.

2) If selling an asset, please take picture of asset then provide documentation to establish a fair market value (e.g., blue book value if selling a car),. Also provide bill of sale, copy of check, and copy of deposit slip showing funds going into your bank account.

3) If tapping into a retirement account, please get a copy of the monthly statement, a copy of the check or proof of wire, and a copy of the deposit slip.

4) Getting a gift from a family member is great!  Simply get gift letter from your lender, get the letter signed by all parties, and get a copy of the check and deposit slip showing funds going into your bank account.

At this point you may be able to relate to the catch phrase, “moving paper through a paperless society" from Dunder Mifflin; the fictional paper company in Steve Carell’s sit- com, The Office.  Simply put, it is “documentation overkill."  Accept it as fact and then move forward with supplying the documentation.

The main thing you can do to avoid THE BIG GOTCHA is to work with your lender to create a game plan on what needs to be documented and when the money AND documentation will be ready. 

Two big “NO NO’s"...

1) Please do not sell an asset for cash or get a gift funds in cash.  Cash is near impossible to document.  You can see a common theme in this process: connecting the dots from where the money came from into the bank account that is being used for cash to close on your new home. 

2) Do not wait till the last minute.  Stay out in front of this potential pitfall by communicating with your mortgage banker.  If you are going to be out of town during any part of the loan process alert your lender and processor.  Going on a cruise for 10 days during the loan process without the right preparation and planning is likely to create a BIG GOTCHA.  Yes, it happens.

My goal is to provide you some checkpoints to avoid last minute chaos and disappointment.  Cash to close is a very big deal!  Typically there is a fair amount of documentation needed for cash to close.  In an age where technology is so advanced and the speed of communication is instantaneous, it is surprising how common this issue can potentially be.   Uneducated, unguided buyers are left with a frustrated (sometimes furious) look on their face as they scramble, jump, and crawl through last minute hoops to satisfy the lending requirements for cash to close. 

Buyers that plan and prepare in advance will continue to their closing without interruption.  Please use this checklist so that you can be that buyer!  It will ensure a more pleasant home buying experience, which is my goal as well as your Realtor’s goal. 

The only thing we have to fear, is fear itself……inflationary fear

Two observations I have seen since I became a mortgage banker on October 1^st 1991:  1) the most commonly asked question in the mortgage business is, “What is your interest rate?” and 2) the biggest change I have seen in the last twenty three years in the mortgage business is rates move on emotion and speculation, before economic data is released and studied.  How are these two observations linked together?

Interest rates have major impact on monthly payment.  Homeowners want to know what price range they should be shopping in and what mortgage payment they can afford.  Rates dictate affordability in the buyer’s mind.  Rates are constantly advertised and used as a primary decision maker for purchasing or refinancing.  Mortgage companies go to great lengths to advertise interest rates.  Governments attempt to stimulate or slow the economy thru regulating rates.  In short, the perception is interest rates rule the psyche of the consumer.

So it is no surprise that mortgage bankers are asked to predict the future of rates every time we answer the phone.   Based on this historical chart it is easy to predict rates will go up.  The only question is “when?”  The answer is simple.  Rates will go up when speculation and emotion drive them up.  When I entered the mortgage business economic data would come out first, suggesting how strong the economy was (or was not) and rates would move accordingly, providing a true reflection of the state of our economy.  Today, perhaps much like the stock market, the market prices interest rates in anticipation of what economic data will be released and speculative interpretation of how that signals the state of our economy. 

A recent move in interest rates serves as a great example of this observation.  Fifty three weeks ago, interest rates for a 30 year fix were resting at close to a 42 year low.  Then one Tuesday, the Federal Reserve hinted that the Federal Government would begin tapering off on their monthly purchase of Mortgage Backed Securities (MBS).  In the span of 4 hours, rates rocketed to .75% in rate, rates moved from 3.5% range to 4.25% range on a 30 year fixed.  “When is turns, it burns” and ouch…that day left a scorching burn!  Keep in mind the cause of this rocket- like rise was a hint……a hint the government was tapering.  

 

Reprodeced with the permission of Mortgage-X.com

 None of us need to be a recognized, published economist to understand rates are low, really low and affordability is up.   Historical data suggest we are near the basement of the interest rate cycle.  Rates will go up.  The question is when will rates go up?  Many “experts” believe rates will stay low for a while.  The government has a huge debt service.  Low interest rates are in the government’s best interest.  The economy is getting stronger.  Jobs are coming back from overseas to America.  Some prognosticators believe the DOW is going to 18,000 +.    Today, one year later, many experts see tapering as a positive sign the economy can stand without the aid of the government.  What a difference a year makes!  Consumer confidence is going up and unemployment is going down.  We are in an election year (just ask Eric Cantor).  All these factors suggest rates should stay steady for a while.  But as Lee Corso says every Saturday on ESPN in the fall, “Not so fast my friend!”  Nothing, and I mean nothing makes rates race up like inflationary fears.  Beware that the speculation of inflation is growing like a tidal wave at sea.  Be alert and listen for the anticipation of inflation.  The government keeps a watchful eye on inflation.  Short of a national tragedy, nothing will make for a dramatic increase in rates go up in a recovering economy like inflationary fears.  

 

So do not fear “inflationary fears”.  Anticipate it.  Lock in on rates at your first opportunity.  Do not find yourself in the same shocking position as those 53 weeks ago who returned from lunch to learn rates had jumped from 3.5% range to 4.25% range one afternoon in the summer.  There is no warning of rates going up when speculation and emotion gain momentum…..especially when it relates to inflation.  Remember gasoline prices going from $1.50 to $3.00/ gallon overnight?  Bingo!