Reasons Why Underwriting Holds Up Providing a Mortgage Commitment Letter
Every home-buyer in New Jersey or any other state for that matter who intends to obtain a mortgage loan to purchase a property needs to be familiar with the language in a standard real estate contract that relates to “Loan Conditions.” Most if not all standard real estate contracts have some type of mortgage contingency clause or escape clause that says, in layman’s terms, you, the home buyer, have a period of time, typically 30 days, to actively seek out and provide a mortgage commitment to show or solidify your intentions to purchase a property.
The lender works to issue a mortgage commitment once you have obtained:
- a mortgage prequalification/pre-approval letter
- a signed purchase agreement or real estate contract between you and the seller
- a satisfactory appraisal of the property and
- a completed mortgage application
A Mortgage Commitment is the legally binding contract between you and the lender. It’s the real thing… your final approval. Generally though, the mortgage commitment is non-negotiable and will un-doubtedly contain a number of conditions you must satisfy prior to closing. The lender does not and will not set up a closing date until you satisfy any and all outstanding conditions. The commitment letter on the date of issuance will have an expiration date.
We generally think of a mortgage contingency clause as a buyer-oriented provision; however, the clause is meant to protect the both buyer and seller. Typically, a home buyer can either terminate the agreement of sale by exercising the contingency if the mortgage loan commitment is not obtained by a specific date. If a buyer is unable to obtained adequate financing in the time frame allotted in the contract, the buyer must provide a mortgage denial letter. Depending on how the clause is drafted, however, the seller may be granted the right to terminate the agreement of sale if, for example, the loan commitment is not obtained by a specific date or if the commitment contains conditions which could result in the loan not closing ontime or at all. Sellers are allowed to cancel a contract and re-market the property for the latter reasons as to not tie him/herself up with a buyer unlikely to close.
Outstanding mortgage commitment conditions vary based on loan type, but typically I see the following unresolved, outstanding conditions hold up a mortgage commitment: (Please note these conditions are in no particular order).
- Failure to Show Proof of Employment and Income (at least 2 years)-If you have a break in your employment history or a change of employers, generally most lenders will allow you to make lateral changes within your industry. If you made a career change for example from a Teacher, a salaried position, to Realtor, a commission based business, a lender may or may not proceed with the loan. A lender typically collects your w-2s, 1099s, two of your most recent pay-stubs, bank statements and proof of other assets. You are asked to provide this information during the prequalification process and and again right before closing. Lenders will sometimes accept a contract between you and your employer to show future employment in cases where you made a non-lateral change.
- Failure to Show Proof of Rental History-Paying cash for rent is not always a good idea for many reasons, but if you are a first time home buyer and you are coming from a rental, you may be asked to show your canceled rent checks to establish your payment history. Failure to do so could hold up your mortgage commitment and sometimes a lender will accept a letter from your landlord alluding to your payment history, but not always.
- Failure to Account for Recent Large Deposits, which large deposits are defined as deposits greater than $1000. If you are involved in a Church organization or a community organization where you receive “gift money,” you must report where your gift money is coming from albeit your group, parents, 401k, etc.
- Failure to have a specific percentage of the assets in your home and in your bank account for a specific period of time.
- Failure to Satisfy any and all outstanding judgements against you: You must pay off collections, unpaid child support, construction loans and other liens attached to you or your property. If you have a common name, you will be expected to sign an affidavit at closing that says you are not subject to any outstanding judgements.
- Blemishes in the title search or breaks in the chain of ownership. A break in the chain of ownership must be accounted for.
- Unsatisfactory Survey
- Depending on loan type a lender may require certain repairs to the property prior to closing. An FHA apprasier is require to inspect ALL interior and exterior surfaces of the property, such as walls, stairs, deck, porch, railing, eaves, windows, doors, fences, detached garages and other outbuildings and appurtenant structures for defective paint surfaces (i.e. chipping, peeling or flaking paint) and report defective conditions in the appraisal report. For condominium units, the appraiser needs to inspect the interior of the unit and exterior surfaces and appurtenant structures of the specific unit being appraised. Failure to make timely repairs have been known to hold up a mortgage commitment and delay closing.
- Lender may ask you to provide a clear termite certificate indicating the property has been treated for termites and/or repairs from termite damage have been completed.
- Appraisal does not support purchase price. In this case, you may have to renegotiate price with seller, make up difference or cancel contract.
- Failure to pre-pay a homeowner’s hazard insurance policy in the amount of the replacement cost value of the home.
- Failure to acquire adaquate flood insurance, if necessary.
- Failure to Provide the Certificate of Occupancy from township- which may or may not be collected by lender-but necessary to transfer title. If you do not have the certificate, your closing my be delayed.
- If the property is a condo or townhouse with an association, a lender may ask for proof of insurance for common elements, reserved funds, number of owner to tenant occupied units, property management information, evidence the association is not subject to any lawsuits or pending litigation pending litigation both structural or non-structural such as environmental safety. In fact, there are a number of townhouse/condo conditions what we will post at a later time. Generally the Condo Association or Management Company must fill out a condo questionnaire to provide answers to a number of items that are important to a lender.
- If you are buying a multifamily dwelling, you must register the building with the Department of Housing, which operates under the DCA (Department of Community Affairs) in NJ. The building must be registered as a multifamily dwelling, inspected by the state and reinspected in the case of violations. When the property has been registered, inspected and reinspected for compliance or repairs due to violations, the property will be issued what is more commonly referred to as a “green” card. The card itself is generally good for a period of 5 years. Here is a list of FAQs of the Bureau of Housing Inspection.
- Failure to explain a large purchase or a new debt before your closing. It is a good rule of thumb not to apply for new credit or spend excessively before making a home purchase, this includes buying a vacation package, financing a vehicle, becoming a co-borrower on another person’s student loan or finance.
- Fluxuations in your credit score before closing. Lenders will verify that your credit score has remained the same since the time of application.
- Expiration of your original mortgage commitment.
Here are other conditions that may not hold up a mortgage commitment but rather a closing that you should be aware of:
In order for ownership of real property to be transferred, the subject property in which the buyer intends to buy and the owner intends to sell must be free and clear of any and all outstanding liens of which the old mortgage on the property is generally paid off at closing. In a short sale situation where the net proceeds of the sale are not enough to cover any or all of the liens attached to a property, a sale or closing might be held or delayed if during the title search an expected lien is uncovered such as an unpaid HOA fees or utilities. Call Angie Perez before more assistance or clarification on any of the items above.
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