You start to fantasize about putting something pretty in your future new garage even though your mortgage loan hasn’t been closed yet. You go out and take out a loan on a sexy red convertible. Oops. Guess what? You might have jeopardized your house loan before it is finalized.
It happens. Mortgage lenders continually tell their borrowers to refrain from getting car loans or any other kind of new credit from the time they apply for the home loan to closing day. After that, you are free to do what you want. But some of them just aren’t listening or don’t understand, says Steven Chester, senior mortgage banker at PrimeLending in San Antonio, Texas.
“The whole deal could be denied, and you lose your dream house,” he says.
Once you apply for new credit for a car — no matter how small — red flags or red lights start flashing for the home lender.
“Credit is tightening and will continue to over the next year. More rules are coming out next year, and consumers need to recognize that it is no longer private enterprise making the rules,” he says. “We have to answer to the government, to our investors, to state governments and to shareholders. They are all making sure we are following the law.”
If lenders don’t follow the rules, they are the ones that get fined and can be put out of business. It’s really nothing to play around with, he says. So, lenders are being more scrupulous. Chester’s business and many lending companies across the country are now making that last check on their customers’ credit before the closing.
“We hired a service company about 5 months ago to do that last check on customers to see if they have taken on any new debt,” he says. “If in disclosure that it shows you applied for new credit and obtained new credit, it’s game over. It’s beyond trust now. The mortgage crisis changed everything.”
Chester explains to all his clients that during a loan application period that as a lender, he is looking for financial snapshot of the person he will be lending money to.
“If the borrower goes in and changes that snapshot, then it’s not good. I tell them that it doesn’t matter if they are applying for a $20,000 mortgage or a $2 million one, the government standards say that we have to treat every loan the same way and every client the same way,” he says.
That means that every borrower will be checked out before all the papers are signed.
Chester has been lending money for homes for 15 years. He experienced the days when there was no internet and applications took three hours to complete and manually had to calculate a customer’s debt to income ratio (or DTI).
Lenders still consider your DTI as one the first factors on deciding how large a mortgage loan you can qualify for. According to the New Jersey Department of Banking and Insurance’s brochure “Everything You Wanted to Know about Buying a Home,” the DTI is called by lenders the 28/36 qualifying ratio. The first number, 28 percent, states the maximum amount of your monthly pre-tax gross income that the lender allows for monthly housing expenses. The second number, 36 percent, refers to the maximum percentage of your all your monthly housing expenses plus all recurring debt.
If you add on to that monthly recurring debt with another car loan before your house loan is finalized, it messes up the whole DTI that was worked out originally by your home lender. You may have qualified to buy a house that costs a certain price. A new car payment could disqualify you for that amount of a house and hence, disqualify you for the loan you wanted.
Of course there are exceptions to the rule, Chester says. If a customer does have something go wrong with their car such as an accident or a breakdown, they need to contact their lender to talk about the situation.
It’s all about fiscal responsibility. If a customer is buying a $60,000 luxury vehicle with cash, but is applying for a $500,000 house loan and isn’t putting a large down payment down, then the lender will have something to say about that.
But if you need to replace a car and you only plan on taking out a similar auto loan that is only $50 more a month from the one they had before, then lenders probably won’t bat an eye, he says.
“There are ignorant borrowers who don’t realize that all of these things are connected, and then there are some with a cavalier attitude,” he says. “My simple message to a customer is that if you had to lend out your own money, what would you like to see from the person borrowing the money? Would you want them to go out and buy a new car while the process is still continuing?”