As the current economic situation unfolds in Santa Rosa and Sonoma County, lenders are constantly changing the way they do business. This constant change is caused by many things such as new legislation, bank failures, lending requirements, market conditions, risk aversion, etc. The list goes on and on.
The result of these changes is that potential buyers are finding it hard to predict the qualifying requirements for a loan, the amount of time required for an escrow, or the final cost of the loan.
A recent change which I have seen in Santa Rosa and Windsor, is new auditing requirements which many lenders are putting into play. A lender “file audit” is simply the lender having a second person or department look through a buyer’s loan file prior to loan approval. In this audit, the lender checks that everything in the file looks correct and in some cases, the lender may require that certain information in the file be “verified” through a separate process.
A good example of this verification is when the lender will request a copy of the buyer’s tax returns DIRECTLY from the IRS and then compare the IRS document to the document the buyer provided directly to the lender. In this way, the lender is verifying that what the buyer provided is accurate and nothing has been left out. As one might expect, a small percentage of these IRS verifications show that the buyer “creatively modified” their tax returns or omitted pages. When this happens, it usually results in a loan denial.
Historically, a lender would only request IRS verification of tax returns for something like 2%-4% of their loan applications prior to approval. Just in the last two months this number has jumped to around 40% and for certain types of loans it could go as high as 60%. The problem, of course, is that with this new flood of tax return requests, the IRS is swamped and cannot get these documents produced in the same time frame they did when only 2% of the loans required them. Add to this the fact that most lenders don’t really have the manpower to quickly process this huge change in paperwork either. This is causing new delays in closing escrows.
As a result of these extended delays, I have recently seen loans that are not ready to close within the time allowed in the Purchase Agreement. This creates the possibility of the Buyer being in default of the agreement and putting their earnest deposit at risk. The remedy to this is to get your loan approval EARLY and be sure that the contingencies written into your Purchase Agreement are structured to protect you in the case of a lender issue. A good real estate agent can help you identify problems like this and help write a strong purchase agreement to protect you.