Avoiding Closing Derailment

Like a train, a transaction can get derailed at any point on the track. A closing can be hit by a clouded title, a home not appraising for value, a rapid change in interest rates, an undisclosed credit or income issue, or one of countless other unanticipated issues.

Choke points cause delays and delays cause all kinds of problems for buyers, sellers, and agents. Moving plans get thrown into disarray. Interim housing or early-possession requests become necessary. Contingency plans need to be thrown together. Nerves get jangled. The resulting situation can be a nightmare for everyone involved in the transaction.

Eighty percent of the problems in closing transactions fall into three basic areas. Stay on the lookout for these problems to steer your home buying or selling experience clear of as much trouble as possible:

1. Documentation and verification: Lenders needs to assemble considerable paperwork and complete dozens of documents based on information submitted by the loan applicants. Then they need to verify all information for accuracy by checking the applicant's employment status, funds on deposit, and income level. The document preparation and information verification process takes time. If you fail to submit the required information on a timely basis, or if you turn it in piecemeal and bit-by-bit, delays are certain to result.

2. Repairs, repairs, repairs: This is a chokepoint that good advance planning can avert. Sellers should consider that only lender-required repairs will be done. If you don't, you leave yourself open to the risk that the buyer will come back with a laundry list of items.

A lender-required note usually limits repairs to structural, mechanical, or health and safety issues – with not a word about nicks in a walls or non-matching door knobs.

Also consider writing a dollar limit for repairs into the initial contract. The number isn't etched in stone, but it will help keep a lid on the potential amount for which a seller is responsible. The buyers may still refuse to lift the home inspection contingency until additional lender-required issues are dealt with, but the limit will help most sellers.

3. Underwriting of the buyer's loan: This is the stickiest of all closing choke points because the underwriter has complete power to approve the loan, approve the loan with additional conditions, or suspend the file until certain conditions are met, in which case the borrower starts the underwriting process all over again.

Underwriters check to make sure that the loan meets guidelines for debt ratio, loan-to-value ratio, credit score, employment history, and other qualifications. They also evaluate the loan based on whether it can be bundled with others in a big loan package that can be sold to Fannie Mae, Freddie Mac, or another entity that buys mortgages.

Very few lending institutions hold their loans to maturity. Most write loans, realize profits through origination fees, document preparation fees, and margins on basis points, and then sell the loans within 30 to 60 days, recouping the loan amount to sell again as part of the next loan deal.

If the underwriter approves a loan that can't be resold, then the lending institution has to keep the loan in its portfolio. If that situation occurs too often, and too many loans can't be resold, the lending institution runs out of money to loan, driving it out of business.

Of all the choke points in a transaction, the underwriting process can cause the biggest delays. Expect that there will be times when underwriters slow things down with requests for second appraisals or additional documentation of value, especially if the home is in a high price range. Once you clear the hurdle, the documents can be drawn and sent to closing.

This article appeared in Realty Times
Written by: Dirk Zeller

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