Five to 10 years ago, lenders passed out mortgages as eagerly as parents hiding Easter eggs for the first time. “Money was free. Anybody could play. Mortgage applications? “You could write one from the grave! Hyperbole, sure, but sowed with a grain of truth. It was a different time.
Now, several years after the housing bubble burst, the pendulum has made a full swing. Lenders say their customers are often caught off guard by a mortgage application process made more rigorous by federal regulations.
Here are some of the hoops you have to jump through before you get the golden egg, er, mortgage – and offer some suggestions that might improve your chances.
HOOP #1: DOWN PAYMENT
Five to 10 years ago, it was far easier to qualify for a loan without contributing a down payment, several lenders said.It’s still possible, but it’s not as common. Loans backed by the Department of Veterans Affairs and a couple of other programs don’t require a down payment, but borrowers have to meet guidelines to qualify. Mortgages through the Federal Housing Administration used to allow down payments of 3 percent or less, but the minimum now is 3.5 percent.
And conventional loans – which made up the lion’s share of mortgages during the housing boom – typically require 5 to 20 percent down. Gifts from parents or others can be used toward down payments – as long as the applicant provides documentation detailing the relationship with the gift-giver and exactly where the money came from.
HOOP #2: DEBT-TO-INCOME RATIO
Imagine income as a pie. The bigger the slice that’s earmarked for debt, the less money that’s available for savings. And with less money in the bank account, families found themselves struggling to pay off their loans once the housing bubble burst.
During the days of lax standards, families commonly qualified for mortgages when 60 percent of their income would be used for paying off various debts. There were even some cases when 70 percent debt-to-income ratios were approved, now the standard for debt to income is around 43 percent.
Loan officers will dig to find out whether applicants rely on overtime pay to boost their incomes, and if an applicant receives child support or alimony, lenders will take notice if the extra income will disappear within a few years as teenagers leave the home.
HOOP #3: DOCUMENTATION
Lenders have to ask a lot of questions borrowers aren’t eager to answer, but the game has changed, and everything has to be documented.
Gone are the days of the no-income, no-asset, no-job, no-questions-asked loan. Lenders approach you as guilty until you prove yourself innocent.
Lenders conduct a thorough analysis of borrowers’ tax returns, bank statements, names, Social Security numbers and addresses. Plus they get copies of returns directly from the IRS to verify the accuracy of the documents submitted by their customers.
If customers’ deposits seem to be excessive compared with their income, mortgage lenders have to have documentation to explain where the extra money is coming from – a challenge in the days of paperless transactions and frequent shredding.
Older customers are more defensive throughout the process, while younger clients are more compliant with requests for documentation.
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Getting a mortgage requires a tremendous amount of patience today. Lenders are going to come back to you and say, ‘You missed page 3 of the bank statement,’ and you are going to say, ‘Page 3 only has the bank address. Are you kidding?’ and they will say have to have or no loan.
It doesn’t matter how wealthy you are, how much money you have in the bank, how high your credit score is You have to provide the documentation.
HOOP #4: CREDIT SCORES
If consumers have any control over the mortgage process, it lies within their credit scores. The first step borrowers should take is to look at their credit scores and then visit a loan officer and get prequalified so that you aren’t surprised after you make an offer on a house.
In the past, borrowers with scores as low as 580 were qualified for loans, and now the low end now hovers around 620 to 640, and the average has increased from 720 during the boom to about 765 now.
Borrowers needs to understand how that credit score affects the cost of their financing If you have a good credit score, you can pay a quarter to a half a percent less in an interest rate. That adds up over 15 to 30 years.
The mortgage experts urge consumers to pay their bills on time, not to max out their credit cards and avoid situations in which a creditor would turn to a collection agency – even on medical bills.
Many experts recommend applying an even amount of debt across multiple credit cards rather than maxing out a single card. Having a mixture of debt – a mortgage, car loans, credit card debt – helps boost credit scores. Also, credit card holders should not close their accounts because that shortens their credit history with the bureaus that calculate scores. Even if a card has no balance, keep it open.
The bureaus – Experian, TransUnion and Equifax – give credit to borrowers who pay off their debts early, We live in a country that was built on debt, they want you in debt – just not too much debt – and they want you to be responsible with your payments
Credit scores get checked again right before the closing papers are signed, Curtis said, so consumers should avoid opening new lines of credit during the application process.
“There’s a message here: Don’t do anything, don’t change anything from the time you apply for your loan until the day you close. So do not go out and buy a refrigerator or a washer and dryer. If you do that, tell your lender so you can deal with it upfront instead of the day of closing.
BACK TO THE FUTURE FOR THE MORTGAGE INDUSTRY
The mortgage business has come full circle.
Lenders stuck by a set of strict guidelines a couple of decades ago, but it became easier to qualify for a home loan, and a lax set of standards became the industry norm.
