The complicated process of home financing
Q: We have found a house and our mortgage has been approved. Closing will be in about four weeks. We want to buy furniture and rugs for our new home, but the loan officer says we can’t. Since we already have mortgage financing, why are we getting such advice?
A: Simply put, your mortgage application has not been “approved,” if by “approved” we mean there are no further tests that might derail your financing.
Financing a home is a complicated process. This may seem odd because you want to be a borrower, the sellers want you to get financing so they can move and the lenders most definitely want you to have a successful closing because otherwise they don’t get paid.
Since everyone is in agreement — at least borrowers, sellers and lenders — then what’s the problem?
The answer is that several other parties need to be happy.
First, the mortgage arrangement must meet all regulatory requirements, generally federal rules established in 2010 to prevent another mortgage meltdown. These rules are the reason you no longer see a mortgage marketplace dominated by toxic loans and no-doc applications. If you want an interesting experience, just call a lender and say you want so-called NINJA financing. NINJA stands for no income, no job and no assets.
Second, if the mortgage is backed by a third party — say the FHA, VA, USDA or a private mortgage insurance company — it must meet insurance or guarantee requirements.
The underwriting process exists to assure that all required standards have been met. The lender must also be able to verify that you have the ability to repay the debt. Not only must the lender be able to prove that loan standards have been met, but they must also have the paperwork to prove it.
Given all of this, borrowers might think that when a loan application has been approved you have a done deal, but that may not be true. There are still opportunities to sink a loan application.
It might seem as though a loan approval is like a photograph. Once the picture is taken, that’s it. In reality, a loan “approval” is not a static event. It’s more like a movie that’s not yet over.
For instance, once approved it may seem reasonable to buy a new car, couch or fancy meal. The catch is that if you buy with financing your credit score might fall. The new score will quickly show up on credit records. Then, when the lender re-checks your credit standing just before closing — and it will — your credit score may change along with your debt-to-income ratio (DTI). For borrowers with marginal credit scores or a high DTI, a lower score or higher DTI can sink a loan application even if closing is just a few days off.
You’ve come so far, your financing or refinancing is nearly in hand, and yet you still must be cautious. The usual rule is this: Spend as little money as possible, do not open new credit accounts and do not increase credit debt until after closing and your loan officer says it’s OK.