Banks Get Funky: The B Side
Banks and Borrowers Still Can't Get Their Groove On
Almost a year ago, in my post “Banks Get Funky”, I wrote about how difficult the lending process had become for residential borrowers. Unfortunately, not much has changed. In fact, lenders continue to move the underwriting goal post with the result of causing closing dates to be pushed back, often to the disappointment and frustration of both buyer and seller. Here are six issues that buyers and brokers need to keep in mind as co-op and condo transaction volume finally starts to increase:
The Pre-Approval Letter
It’s time for this document to go the way of the palm pilot. Although brokers often encourage sellers to accept an offer because their customer has multiple pre-approval letters, this initial review of the buyer is basically useless. Both the buyer and the co-op or condo must withstand the full review process by the Dr. Evil of the lending process, the underwriter. So waiving a pre-approval letter as a reason to accept an offer doesn’t really provide much comfort. To prove my point, take this scenario for a test drive: The next time someone lauds a pre-approval letter, ask the buyer if he or she is willing to waive the mortgage contingency. That will tell you everything you need to know…
Good Faith Estimate
Going from the ridiculous to the sublime, as a result of changes in federal law in January 2010, the good faith estimate has become a very important document. Accuracy in disclosing closing costs is essential, as an understatement can cause banks to withdraw their underwriting, unless someone (usually a mortgage broker or title company) absorbs those misstated costs. There are specific tolerances for mistakes and some items, like incorrect origination fees, can’t be remedied. Buyers and their attorneys should carefully review this document, which has to be delivered three business days after the loan application is submitted.
Banks are now often requiring condo purchasers to obtain a “walls in” policy also known as a “HO-6”. Buyers should be in touch with an insurance broker early in the underwriting process to insure the required coverage is available. That’s the easy part. Lenders are carefully reviewing the insurance coverages maintained by co-ops and condos. The bugaboo de jour is the building’s fidelity bond coverage, which sometimes is below current guidelines. The buyer’s attorney should obtain the co-op or condo’s insurance declaration page as soon as possible to make sure the building will satisfy the bank’s lending requirements. Get this loan condition cleared as soon as it rears its ugly head on the commitment letter.
Banks Require Accuracy
Forwarding the bank a copy of the fully-executed contract to initiate underwriting continues to be standard operating procedure. But banks are now obsessing over minor mistakes, cross outs and handwritten changes. Recently, I was asked to prepare an amendment to a contract because the zip code of the property being sold was wrong. I think that says it all.
Require a Funding Contingency
More than ever, contracts should include a funding contingency in addition to a mortgage contingency. Particularly with low occupancy condos that are relying on FHA financing, the possibility that a bank could initially provide a loan commitment and then change its mind and withdraw the financing, continues to be a real possibility. A buyer should not be left in the lurch if the bank sours on the co-op or condo and the financing goes away.
As Long as They Don’t Stay Over
Parents are often stepping up to help out the kids with their first purchase. In many cases, the parents would prefer to act as guarantor on a co-op or condo loan, rather than be named as a co-purchaser. Banks, however, usually require the parents to “be in title” with their offspring and will not accept only a parental guaranty of the loan. Buyers would be wise to investigate a lender’s collateral requirements before making an offer based upon a parental loan guaranty that very few banks will accept.
Residential Reality: There’s More in Store
Besides the usual hi jinx that you can anticipate on April 1st of any year, this one will be special: a new rule implemented by the Federal Reserve Board, complementing other changes under the Dodd-Frank reform law, will significantly change the way compensation is paid to loan originators. Expect interesting and unintended consequences.
For more, see Has Dodd-Frank Slayed the Mortgage Monster?