Adding new debt during the mortgage process can be a problem

Mortgage lender: Harry Sessa

Purchase price: $300,000

Loan amount: $285,000

Loan type: Conventional, 5 percent down, conforming 30-year fixed

Backstory: Sessa always reminds his clients not to take out any additional debt, including credit cards, during the mortgage application process. Unfortunately, not all of his clients follow his directions.

In this case, although the clients were instructed up front to not apply for any new debt, about three weeks into the mortgage process they decided they wanted a new car to go along with their soon to be new home.

Mortgage approvals are based on the review of credit reports accessed as part of the pre-qualification process or at the time of application. These credit reports are used to qualify the client.

Understandably, the underwriters look carefully at the borrower’s ability to make payments on the new mortgage and any outstanding debt along with their job history, property appraisal, income and assets.

The buyers’ debt-to-income ratio (DTI) is the combination of their mortgage payment, including taxes and homeowners insurance, combined with the monthly payments on any outstanding debts they have on their credit report, relative to their monthly income.

Harry’s clients applied for a 5 percent down conventional mortgage, which required not only the usual scrutiny from the bank underwriters but approval from a mortgage insurance company for the loan to be insured.

They had bought their new car about three weeks into the process, after the loan was approved, but prior to closing. This resulted in another $200 per month payment to their monthly obligations.

Typically, a lender gets an updated credit report just before closing to insure the client’s financial status has remained the same during the mortgage process. In this situation, United Bank had to re-underwrite the loan adding the additional car payment to make sure the borrower still qualified.

The client’s decision to take out a new installment loan for a car after they applied for the mortgage created additional stress for everyone about a week before the scheduled closing.

After a discussion with Sessa, the borrowers decided to get a gift from a family member and pay off some existing loans to give them a better monthly cash flow.

It is wise not to apply or take on additional credit once you have your mortgage application in process. The loan did close on time, but it was only through a great team effort by Sessa and United Bank to meet the original closing date.

Harry Sessa, United Bank, (203) 494-1478 (cell)