I got myself preapproved for a mortgage three months ago then, when I found something I wanted to buy, the bank wouldn’t give me a mortgage. Why not? I don’t understand.
Trying to Buy
Dear Trying to Buy,
First of all, well done for going to the bank and getting preapproved. This is an essential part of home-buying that people often don’t think is important enough to be done before they find something they like. The process can actually take longer than you imagine (sometimes up to three weeks); delays can be caused by how savvy you are getting your paperwork together and whether your lender is on holiday or out sick.
When you see your dream home, you want to be in a position to move quickly, failing to do so could mean someone else gets their offer accepted ahead of yours. Having a lender’s letter in hand signals to sellers that you’re a legitimate buyer whose offer merits serious consideration.
However, having been preapproved why were you then denied? There are a few reasons why this can happen. Perhaps the most common one is that the property you like appraises lower than the price you offered. In many cases this means going back to the drawing board with the vendor and renegotiating a figure that works for everybody.
Even so, a preapproval letter is just a conditional commitment and can be withdrawn if your financial situation changes, jeopardising your chances of getting a mortgage when the time comes.
• Quitting your job
There’s nothing wrong with leaving a job to take a similar or better-paying position at another company, but the bank will take into account probation periods.
Taking a significant pay cut will raise red flags as will switching from a salaried job to a position where you’re compensated mostly on commission. Quitting your job to launch a new venture is a no-no, at least when it comes to keeping your mortgage approval.
Lending guidelines are much stricter for self-employed borrowers, and most lenders typically want to see a two-year track record of income.
• Loading up on debt
This is an obvious bit of advice, but one well worth heeding. In the weeks or months after you get preapproved, and before you close on your home, keep your spending impulses on lockdown. That means no new credit cards, no car loans, no new furniture or big-ticket purchases of any kind. Ignoring this rule of thumb is likely to bring scrutiny from your lender.
Running up a balance on a credit card will also lead your lender to re-examine your debt-to-income ratios. If you were on the borderline before your shopping spree, the new bills could kill the deal.
• Paying down old debt
Paying off delinquent debt, settling up with creditors who have charged off an old debt, cancelling credit cards, all might seem like responsible moves, but ask your lender for advice on this as it can cause lenders to look more closely at your finances. You think you’re cleaning up your finances but your lender might see it as more available credit, and you could be jeopardising your standing. The rule of thumb for retiring charged-off debt (unless requested as a condition of approval) is the same as the guideline for taking on new debt: wait until after you’ve closed on your home.
• Moving large sums of money
Down payments are a challenge for first-time buyers and many ask relatives for help. However, receiving any sum that amounts to more than half your regular paycheque is likely to draw scrutiny from your lender. Banks are now under very strict anti-money laundering laws. They also want to be certain any sudden windfalls are in fact gifts, and not loans. If money is moving around, that is going to be a red flag for an underwriter, and they are going to pull out the magnifying glass.
The good news is that receiving a gift does not need to kill your pre-approval. But your bank will probably require you to provide a paper trail that includes a letter stating the money is a gift and even require a bank reference or bank statements from the gift giver, which can be tedious. Ask your lender what the best protocol is, in this regard.
• The bottom line
Keep in mind mortgage approvals are based on complex calculations and the banks want to protect themselves from bad loans or borrowers defaulting, and every person’s situation is different. In general, though, your overall financial health matters. Most agents are familiar with the preapproval process and can walk you through it or even provide you with the name of a loan officer. At the end of the day it is not worth you wasting your time or your agent’s, looking for property if you don’t have any idea what price range you are working in, or what type or length of mortgage you qualify for, or if you might be jeopardising that “offer of financing” by doing one of the above.
• Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for nearly 30 years. If you have a question for Heather, please contact her at firstname.lastname@example.org or 332-1793. All questions will be treated in confidence. Read this article on Facebook: Ask Heather Real Estate