The Veridian Blog

A: I am well-qualified to borrow the money required to purchase this new house but how long should my financing contingency be, if any?

Q: In most instances we will defer to the realtor who is familiar with the subject property, neighborhood market, dealings with the listing agent and the their negotiation history.  What we offer is advice based on our confidence level with the buyer’s ability to obtain financing.  Only in rare seller’s markets will we recommend a financing contingency waiver – which was not at all uncommon during the so distant housing boom of the early 2000’s.  Aside from that, we usually require 3 to 5 days, but more recently 7 to 10 days because of the mine-riddled new RESPA disclosure laws.  The good news is that in today’s mortgage market, it doesn’t take long to get an answer given all the automated underwriting that wholesalers have finally implemented into their online submission paths.  If there are red flags or issues we are concerned with, we will recommend a longer contingency period – to allow time for the file to be reviewed by the underwriter for official approval.  That way, we will be able to see the approval conditions and ascertain the likelihood of funding with much greater clarity. 

If you are well-qualified in terms of Debt-to-Income ratio, Loan-to-Value and FICO scores, then we probably wouldn’t hesitate to recommend a 3 to 5  day contingency period – even with the market’s tightened lending standards.

Q: “If I can afford to keep both mortgages at the same time and rent out my current home, what problems may arise during the loan process for the new home?”

A: In no particular order, here are some possible issues that an underwriter may condition to be satisfied prior to signing in escrow:

1.      Down payment:  Because most people must sell their home before purchasing another, the source of your down payment on the new home will be highly scrutinized.  In addition, you will still need to come up with a minimum of 20% -  a tough task in the Bay Area when you decide to keep both homes.

2.      Rental Income: The underwriter will require substantiation via rental agreement and Schedule E from the 1040 tax return and probably also a copy of the cancelled check for the security deposit or first month’s rent.  Fannie Mae also requires a minimum of 30% equity in order to factor in rental income into the debt/income qualification ratio.

3.      Note and DOT for existing mortgages: Nowadays more than ever, lenders will condition for the Note on existing mortgages to ascertain the exact terms of the loan, negative amortization language, prepayment penalties and acceleration clauses. 

4.      VOM or payment history, or cancelled checks for newer mortgages.

5.      For borderline situations, underwriters may require higher qualification standards on lines-of-credit.  Because they are based on a variable rate that can fluctuate at any time, a conservative, higher qualification rate will be used in calculating income qualification and that will increase the debt-to-income ratio.

This additional paperwork is required after income is first established to qualify for both mortgages.  If you don’t have the required income to begin with, then this analysis is moot.

Q: I have an offer on the table for another, higher paying job.  Should I accept it now, or wait until close of escrow before changing positions?

A: The general rule of thumb is that if the close of escrow date is at least 30 days away, and the borrower is moving from a salaried position to another salaried position in the same industry, then there should not be a problem in qualifying with the same or better income.  So you should be okay.  In situations where one or more of those factors are not present, however, then you will probably have problems qualifying.  The central issue is employment stability.  Underwriters look at how long borrowers have been at their current job, how similar the position (title) and industry are, the location of the new job, and whether income is staying the same or increasing.  Any decrease in income, or a demotion, or a move to a different industry will certainly raise red flags.  Also, if a borrower is moving to a self-employed, hourly or contracting position, they will not be able to use the earned income because a 2-year history would be required.  This is true even if the position is the same, or even within the same company!  Guidelines regarding employment used to be more lenient in regard to self-employment income, but nowadays, the 2-year rule is pretty strict.

As such, it is critical that your new position be salaried.  By close of escrow, most lenders simply require a copy of the first paystub for loan approval, although we are starting to see that guideline expand to paystubs to cover the first 30 days.  If the borrower can be flexible, it may sometimes be easier (and less stressful) to postpone the new employment until after close of escrow.

Q: I have plenty of funds to put down about 40%, but it is spread out amongst a half-dozen different brokerage, checking, savings and CD accounts.   If I have to consolidate it all into one account, can I do it at the last minute to maximize interest income?”

A: You are free to do what you want.  However, the lender will be concerned that any large recent transfers might be undisclosed debt obligations or gifted funds.  In addition, transferring from account to account can be very burdensome for you because you will be required to paper trail everything – deposits and receipts - and establish 60-day seasoning for the stated funds.  To make things even more difficult, some lenders still do not accept internet printouts unless they state the borrower's name, address and account number (which banks today rarely do because of identity protection).  So with some financial institutions, you may have to call to have a proper statement mailed or faxed.  All this takes time, and in a purchase transaction, time is a premium. 

Towards the end of escrow, I recommend wiring funds directly from one account into escrow.  That is the easiest way to establish and prove a paper trail of money.  And more importantly, it is the fastest way to transfer when time is of the essence.