This month, we’ll talk to mortgage leaders about where the market is headed and how products are evolving digitally to suit buyers’ needs now. We’ll also explore emerging alternative financing options that are changing the game for buyers and sellers. Join us for Mortgage and Alternative Financing Month.
A few years ago, in a similar market to the one we are currently experiencing, we managed to get buyers into a contract on the home of their dreams. It took a lot of effort; they were blown out in many multiple offer situations before we finally managed to ink a deal. Needless to say, they were ecstatic.
A week later, as they pulled up to the property to meet with the inspectors, I noticed they were driving a brand-new BMW. “You borrowed that car, right?” I queried.
The husband proudly proclaimed, “No — it’s ours — now that we know we are going to have a garage, we bought a car to go in it.”
Speechless for a moment, I gathered my thoughts and then said, “I’m sorry to say this, but you no longer have a garage. In fact, you no longer have a house.”
Unfortunately, their new car purchase pushed their debt ratio over the limit, and they no longer qualified for the mortgage required to purchase the home. That was a day of bitterness for the buyers and of reckoning for me.
It marked a new phase in my career: a commitment to make sure I changed the messaging we provide to buyers before they begin looking for homes so that mistakes like this would never happen again.
We now schedule a meeting with all our buyers before opening the door to any prospective home. Although we cover many topics in our time together, we pay special attention to credit do’s and don’ts and potential financial mistakes to avoid once they get into contract.
Here are the top 10 things we now advise them never to do once they begin looking to buy a home:
1. Don’t apply for new credit
Most people understand this, but some get so excited about getting new digs they start setting up lines of credit with furniture stores, home improvement centers and the like.
Every time a buyer applies for new credit, their credit will be pulled by a potential creditor or lender, and they run the risk of immediately losing points on their credit score.
2. Don’t make any large purchases
We advise our clients to hit their “patience button” and avoid any large purchases until escrow has closed. Even though we explain this to all of our buyers upfront, we constantly get pinged with questions such as, “The appliances I want just went on sale — I can save hundreds. Are you sure I cannot buy now?”
We explain that if they have significant enough reserves that they can pay cash, go ahead. If they need to buy with credit, they need to hold off.
3. Don’t pay off collections or ‘charge offs’
This point might seem counterintuitive, but let your clients know that if they want to pay off old accounts, do it through escrow. Once the debt is paid, make sure they get a “letter of deletion” from the creditor.
4. Don’t close credit card accounts
If you close credit accounts, it might appear that your debt ratio has gone up. Closing credit cards will affect other factors in the score, including credit history. Lenders use active credit lines to establish creditworthiness, so they need to stay active.
Once, our clients preemptively assumed that it would be best to have a little credit exposure as possible, so they closed all their credit lines before applying for a loan, only to discover it was the worst thing they could have done.
5. Don’t max out or overcharge credit card accounts
Tell them to keep credit card balances below 30 percent of their limit during the loan process. If a buyer pays down balances, do it across the board. If possible, keep credit card spending to a minimum during the homebuying process.
6. Don’t consolidate your debt
When consolidating debt onto one or two cards, it appears that the buyer is “maxed out” on that card and will therefore be penalized.
7. Don’t change bank accounts
Do not close accounts, open new accounts or change banks altogether. This sends off all kinds of warning signals to loan underwriters.
8. Don’t deposit cash into your bank accounts
Instruct your buyer to talk to their lender before making any cash deposits. If the money is from a family member, it must be accompanied by a gift letter.
If it is cash from any other source, the lender will need to verify its’ source before it hits their account. In the same way, buyers should not arbitrarily transfer money from one account to another.
9. Don’t co-sign loans with anyone
This is never a good idea to begin with, but while your buyers are getting a loan of their own, it’s forbidden.
10. Don’t do anything weird
Instruct your buyers to avoid things that will cause a red flag to be raised by the scoring systems, including changing their name or address, missing payments, making late payments or changing spending patterns.
It’s hard enough to get into contract these days — make sure your buyer does not financially self-destruct along the way.
Carl Medford is the CEO of The Medford Team.