April 2, 2024
Needham, MA--It takes a lot to get a real estate transaction to the closing table and no one, least of all the lender, wants undisclosed debt showing up in the file at the 11th hour.
Undisclosed debt can be a purposeful strategy a borrower uses to ensure they get the best loan terms, but it can also be a result of a borrower’s ignorance of what must be reported and what can happen when additional debt is acquired between application and closing.
Both the real estate agent and the loan officer can help minimize the incidence of undisclosed debt by properly educating the customer about what must be reported and the consequences of failing to report.
Common types of undisclosed debt
Most borrowers when reporting debt logically focus on those payments that they must make each month against a specific amount borrowed, such as college loans, auto loans and credit card balances.
Other debt may not seem relevant to them, such as:
- Money owed to a parent or investor for a previous home or rental property purchase
- Payments made for past due child support
- A payment plan undertaken to pay back taxes
- A new credit card acquired just prior to closing to purchase furniture
Often, undisclosed debt does eventually show up, but it is in the best interest of the real estate agent and the loan officer to mitigate against late-in-the game disclosures as neither professional is interested in putting in substantial time on a transaction that never comes to fruition.
Here are some steps to take with the borrower to ensure undisclosed debt does not KO the deal:
Educate the borrower
In addition to telling the borrower that they must disclose all debt, explain to them why this information is important. This includes explaining debt-to-income ratio so they can understand how this impacts the interest rate, their ability to get approved for a mortgage, and the price range of home that will optimize their chances.
It is also helpful to inform them of steps they can take to improve their credit score, whether that is reducing credit card balances or clearing up incorrect information on their credit report.
Enumerate causes of post-approval denial
Often, borrowers think they are free and clear once the loan approval comes through, and proceed to change jobs are acquire new debt.
Let the customer know that dramatically changing their income or debt picture before closing could result in a denial later. Homebuyers often think once the numbers are run, that is the end of the game, but cautious lenders always run updated credit reports and debt reviews prior to funding, so it is not uncommon for a denial to come through close to the closing if new debt is discovered.
Keeping the borrowers’ best interests in focus is the best guide for real estate agents and loan officers as they assist their clients in purchasing a new home. Never assume the client has the depth of knowledge you have about the intricacies of the mortgage process and always be ready with information, sources and handouts to help educate them every step of the way.
At Kriss Law/Atlantic Closing & Escrow, we make every effort to educate our customers about the nuances of the real estate, mortgage and closing processes. Contact us to learn more about our services and expertise.
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