What a Pain in the Assets! I Didn't Have to Document That Last Time.
It’s been awhile since you bought your last home.
You gear up to apply for a mortgage, you call your mortgage advisor, fill out an application, and WHAM, you get hit with an unexpected documentation-fest.
You thought you had all of your ducks in a row.
“It can’t be this complicated, can it?” you think.
“But I didn’t have to document this much stuff last time I got a mortgage.” you tell your advisor. “Why now? I have great credit, 20% down payment, a stable job, what’s the problem?”
Welcome to 2010. The world of banking is completely different now than even 2 or 3 years ago.
Every day I have someone tell me that they are frustrated because they have to document everything in so much detail. Most express the fact that last time they got a mortgage, there wasn’t nearly so much involved.
Simply put, the reason for this is that banks are paranoid. Banks are very cautious and conservative on extending credit because of the rash of foreclosures over the past couple years, partially due to shaky underwriting practices in the past. Gone are the days where showing up in a mortgage office was enough to get a mortgage.
Banks have tightened up underwriting requirements in an effort to curb the number of bad mortgages that they write and improve their portfolios. Add an increase in government regulations and the result has been a significant increase in documentation requirements over the past couple years.
Here are some things to prepare for that you may not have had to deal with a few years ago:
The appraisal process has been complicated by the introduction of the Home Valuation Code of Conduct (HVCC) in 2009. In an effort to curb appraisal fraud, HVCC put safeguards in place that prevent mortgage companies from talking directly to the appraiser. In addition, there is now a rule in place that prevents an appraisal from being ordered until 4 business days after you have been sent loan disclosures by the lender. The net result: higher appraisal fees and longer turn around times.
Believe it or not, you now must document your assets to obtain a mortgage. This includes money necessary to close for down payment and closing costs as well as “reserves” or excess money in the bank after closing. Any unusual deposits over the past 60 days must be “sourced” which means showing where the money came from and that it was yours originally.
In addition, some lenders have recently been requiring proof of the terms of withdrawal from any asset account even if you aren’t drawing on the account for closing. This requirement seems ludicrous if you are not tapping into the funds for closing, but lenders want to be sure you will not be hit with a large penalty or high interest loan if you do have to draw on the account in the future for an emergency.
If you have been employed in the same line of work for less than two years, it will be extremely difficult to obtain a mortgage. The exception is an FHA mortgage which allows for recent graduates or someone re-entering the work force after maternity for example, to get around the 2 year requirement.
Self-employed individuals will also have a more difficult time as two years self-employed is mandatory for virtually every program. You must prove two years self-employment through articles of incorporation, articles of organization, or business license.
Be ready to provide a “credit inquiry” letter which will explain every credit pull you have had over the past 90 days. Lenders want to make sure there are no debts you have that are not appearing on your credit. In addition, depending on the frequency and age of any derogatory items, you will potentially have to provide a “letter of explanation” explaining each derogatory item.
Credit scores of 620 and above are mandatory to qualify for any program (there are a few lenders who claim they can help people with scores below 620, but in practice, it is virtually impossible to get a transaction approved with a score that low). You will pay a higher rate with scores in the 600′s, and lenders will scrutinize your credit, especially if you are in the 620-639 range.
Income has been the area that has been hit the hardest with stricter requirements over the past few years.
“Stated” income financing has disappeared, and all borrowers must now document all income. This means that the self-employed borrower who writes off all of their income can’t qualify. Depreciation expense for self-employed filers can be added back to income for qualifying, but that usually isn’t enough to offset a zero or low adjusted gross income. This is very frustrating for most self-employed people I talk to. Even if they have become aware of these changes and started to write off less of their expenses in order to boost their income on paper, the lender will take a 2 year average of any self-employed income, and will use that for qualifying.
Another area that has changed with most lenders is the ability to use rental income to qualify. For one, you must claim the rental income on Schedule E of your tax returns in order to use it. If you haven’t, then you likely will not be able to use the income. Lenders no longer will accept rental leases as proof of rent collected.
Although recent guideline changes have made qualifying for a mortgage more difficult, and the paperwork required more challenging, it is possible to obtain a mortgage. In fact, we have seen quite a few loan approvals come through with very minor or no loan conditions (items required by the lender in addition to the items submitted with the original loan package). The key is documenting everything properly up front.