Nov. 11, 2008
The mortgage meltdown has brought a return to proper verification of a borrower's assets, especially for investors. But just how long is the information stated on your home-loan application considered valid?
If you retire or lose your job after your loan closes, can the lender demand payment in full of your rental property? Those questions, and others like them, were raised recently by a long-time nurse whose lender demanded that a “reverification form” be signed at closing of a small duplex. She was especially concerned because she had already provided her financial information — bank deposits, stocks, income — at the time of application. She was a widow and was planning to retire in the next 18 months.
Although lenders sometimes disclose at the time of application that employment, assets, and credit may be reverified again near, or on, the closing date for quality-control purposes, a reverification form does not usually accompany the closing papers. The nurse also was confused when the mortgage broker told her that it would be necessary to recheck her credit and assets if the lender decided to sell the loan on the secondary market to another lender or investor. The broker said the new lender or investor would need to know if the borrower still had the means to repay the loan.
Post-closing verifications are done on about 10% to 20% of a lender's loans to make sure the lender is meeting quality standards and not selling loans of lesser quality in the secondary market. But there's no way of guaranteeing the borrower's employment or specific assets for any significant time period, especially for the entire term of the loan. If it could be done, lenders would certainly welcome the practice because they would be funding what would really be no-risk loans.
The reason lenders require verifications of employment, bank accounts, and credit before funding a loan is to determine if the borrower has the necessary downpayment and can make the monthly payments at the time the loan is made. However, it's difficult to predict which borrowers will fail to make payments.
Some renters leave without notice, yet owners try to find a way to make mortgage obligations. Owners who rely solely on rental income with no emergency cushion can find themselves in a hole quickly.
Deliberately falsifying statements on a home-loan application can result in stiff penalties and fines. Lying on a Federal Housing Administration loan application is a federal offense.
Reverifications are done to determine if there was any fraud or misrepresentation of fact at the time the loan was made. Lenders say post-closing verifications are not done to further investigate the borrower — they're done to ensure the integrity of the company originating the loan.
When a loan is sold to an investor in the secondary mortgage market, the investor expects to get what he or she pays for. If the borrower meets explicit downpayment, credit, and income requirements, the loan is deemed worthy of being sold in the secondary market, thereby guaranteeing the investor a
quality loan.
Lenders also want to make sure their quality-control process meets all proper guidelines because they do not want to buy back loans sold to investors if discrepancies in the original documentation are found.
It's extremely rare to see any post-closing questions directed toward the borrower. It is usually stated in loan documents if any of these kinds of questions can be asked once the loan is closed. Typically, as long as loan payments are made on time, no questions are going to be asked.
In this case, our retiring nurse was concerned that her background and asset information would become available to any lender/investor shopping the secondary market. She had significant revenue streams and was reluctant to again surrender personal information.
It turned out that not all needed assets were verified at the time of application. The mortgage broker's supervisor intervened to clarify the form and the
missing information.
Keep in mind that we've returned to a more-stringent lending environment. Lenders definitely will want evidence of your ability to repay your loan, particularly on a rental property.
