Practically everyone in the country knows the real estate market meltdown and the events of the Great Recession caused many changes to go into effect. As a result of the housing crisis, lending has undergone a big transformation as new federal regulations and industry standards have gone or are going into effect.
Banks took a large hit during the past several years, beginning in 2008 and well into 2010 and 2011. During that period of time, hundreds of millions of dollars in defaulted loans occurred, both secured and unsecured. Lending institutions saw a steep drop off of timely payments and were eventually left to carry the burden of unpaid loans, which included mortgages, refinances, credit cards, auto loan, student loans, small business loans, personal loans, and commercial lines of credit.
At one point, during June of 2010, it became an industry standard to run a second credit check on every mortgage applicant, usually happening one to three days before the transaction settlement date. This was routinely done to prevent closing a loan with applicants that took on new debt. Since that time, other methods have been employed.
Lending Changes Still Happening
The lending industry is still seeing changing being implemented. Now, second credit checks still occur, but banks have also begun to employ new techniques to detect buyer debt. Technology is playing a large role in the process of mortgages, with many banks not wanting to calculate the “hit” of multiple credit inquiries. Instead, some are using such things as commercial or in-house fraud detection.
“If you're thinking about applying for a home mortgage...your lender is likely to order a second full credit screening immediately before closing. The last-minute credit report will be designed to find out whether you've obtained — or even shopped for — new debt between the date of your loan application and the closing. If you've made applications for credit of any type — for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card — the closing could be put on hold pending additional research by the lender.” --L.A. Times
Fraud detection technology is tied to an individual’s social security number and alerts lenders of new inquiries and debt instruments when they occur. Another type of technology is also being used by lenders. A service by credit bureaus which was created by the Equifax corporation and is called, “Undisclosed Debt Monitoring”. Essentially, the system watches in the background during the one to three month period or “quiet period” between a mortgage application and closing.
Industry studies consistently show that homebuyers are prone to take on new debt during the quiet period, with purchases like new furniture, and credit card applications. This seriously affects an applicant’s DTI or debt-to-income ratio, the difference between a person’s or couple’s monthly gross income and monthly debt obligations.
The 5 Most Common Problems Ruining Mortgages
New debt is a big deal to lenders, as about $150 million in auto loan payments is not disclosed by applicants or detected by lenders. The average auto loan payment is $460 across the nation, which is more than enough to cause lenders to reject an application or pull an approval before closing. This is just one instance of the most common things which kill a mortgage. Here are four more reasons banks back out of mortgages:
Buyers have a significant change in their cash reserves. A very common misconception is that once a mortgage is approved, the closing is only a technicality and any spending that doesn’t require credit is completely okay with the bank. Unfortunately, this isn’t true. Sure, if you finance a new car, that will be on your credit file, but what if you pay cash for the vehicle? That large withdrawal from your account won’t go unnoticed and the lender is likely to pull the home financing rug from under you.
Buyers make career changes. As long as you’re making the same salary as you did before or even more, this shouldn’t matter, right? Wrong. If you change employers, even if your income increases, lenders might not let the loan close, which is the worst case scenario. What’s likely to happen is a big delay in closing to allow time to demonstrate your new position is stable.
Buyers miss monthly payments. The no-second credit check technology doesn’t detect one thing: missed payments. Debt monitoring only works to find inquires and new accounts, but it doesn’t tell a bank if you’ve missed one or more payments of your monthly obligations. Missing a credit card payment or student loan payment is a no-no before closing.
Buyers stretch themselves to financially thin. Another problem is not having enough cash on hand to pay part or all of the closing costs. A lender might walk if you don’t have enough set aside to contribute or pay these fees.