Over the last few weeks I’ve had a few sellers balk at receiving an FHA contract and a VA contract. In both instances I had to reassure the agents to communicate to the sellers that the borrowers were strong and that there is basically little difference in an FHA or VA loan compared to a conventional loan as far as speed and difficulty. Below I break down the 3 different types of loans in terms of processing times and the appraisals.
Processing and closing times: Basically, there is little to no difference in how long it takes to process and close a conventional loan compared to an FHA or VA loan. All 3 types of loans are underwritten and closed by the lender and do not have to go to FHA or VA to be processed or underwritten. When sellers complain that they do not want to accept an FHA or VA loan because it takes longer to close, let them know it is just not true. Also, all 3 loans use computerized underwriting modules. Once the loan is approved by the underwriting module then it is up to the lender to gather the conditions. The FHA and VA conditions are no harder to obtain than the conventional conditions. If the processing and closing time are taking forever then blame the lender, not the program.
Appraisals: As far as value, all 3 programs use basically the same criteria to obtain their values. It will be based on past sales that are similar to the actual home being sold. The same appraiser will get the same value under all 3 programs. Different appraisers might get different values on the same home but not because it was an FHA or VA compared to a conventional. It will be because one appraiser used a different comparable or used a different adjustment than the other appraiser used. The only real difference you will see in the appraisals under the 3 different programs will be that FHA is a bit more strict when it comes to detail. FHA has to check to see that all the mechanicals and kitchen appliances are working and has to inspect the attic and crawl spaces. Plus for homes built prior to 1978 they need to check for chipping and peeling paint. That doesn’t mean that a conventional appraiser will not point these items out but an FHA appraiser has to.
So to recap. If you are an agent then let your sellers know that there is little to no difference in an FHA or VA loan compared to a conventional loan. And if you are selling a home don’t be concerned about the type of loan in the contract, be concerned about what mortgage lender the borrowers are using. The lender is much more important to the speed of the transaction and getting to the closing table than the program being used.
So you just purchased a home and closing is in 45 days. You make loan application with your lender and he or she lets you know everything is great and you are approved. You are super excited! But the key now is to stay approved. In order to do that you must avoid the following things during the loan process:
1) Do not apply for any new credit or open any new credit. This could drop your credit scores or knock your ratios over the limit. Some lenders pull your credit again at the end of the transaction to make sure you do not have new debt.
2) Do not change jobs or change the way you are paid. If you receive a salary and change to commission during the application process, that could cause huge problems.
3) Do not transfer money around. If you do, let your loan officer and processor know exactly what you are doing. They will tell you what documentation you need to show.
4) Do not make random or undocumented deposits into your bank account. Show a paper-trail for any deposit. Plus, be prepared to explain and document any large deposits you have made in the last 60 days.
5) Do not accept any gifts without letting your lender know. Your lender will tell you what documentation is needed plus let you know if the gift is even allowed.
6) Do not forget to pay your bills. A missed payment could knock your scores down and change the loan from an approval to a refer.
Avoid these 6 items and the loan process will be much smoother and less stressful.
The lending business has seen major changes over the last 5 or 6 years. I remember when I first started doing mortgages in 1987. It was a lot like it is now. I used to have a poster in my office that made fun of all the items you had to give your mortgage company in order to get a loan. The last item at the bottom of the poster asked for the following, “Please supply us with a copy of your great grandmother’s social security card.” Over time things changed until it came full circle and we were basically giving loans to almost anyone. We could do what was called a ‘no-doc’ loan. Put down a little money, have ok credit, do an appraisal and that was it. No other questions about assets, job, and definitely not your grandmother’s social. That philosophy ultimately burned the mortgage and real estate industry when real estate values started going down in 2007.
Now we are basically back to 1987 and getting everything under the sun from the borrowers and asking them to supply us with documentation and then more documentation. So, here would be my advice to real estate agents about what to tell their clients. First, give your clients a little idea about what it will be like as far as documentation. Second, let them know why the lenders might ask for so much documentation. The lender’s want to make sure the borrowers can make their payments and the lenders do not want to buy the loan back from Fannie or Freddie if they failed to document the file correctly. Third, let them know that the bank is loaning them a lot of money and they have a right to ask for most of the documentation they are requiring. Fourth, give your clients the list below so they are prepared when meeting with the bank.
- Most recent paystubs for one month.
- W2’s from the last two years.
- Signed copies of your last two years’ tax returns, including all schedules that were filed.
- Homeowner’s insurance company name and number.
- Most recent bank statements for two months (statement must include all pages and have name of borrower, account number, and bank name).
- Most recent statements from any retirement and investment accounts for two months.
- Copy of purchase contract and earnest money deposit.