It's harder than ever to get a mortgage. Since the financial crisis more than five years ago, lending standards have tightened. Given these demanding requirements, knowing how to apply for a mortgage is more important than ever.
It took an act of Congress creating an entire regulatory agency, the Consumer Finance Protection Bureau, to ensure that the mortgage lending industry makes loans to customers who can actually repay them. Here are some of the biggest changes prospective home-buyers will face now that the CFPB is the new mortgage-lending sheriff in town.
If the road to hell is paved with good intentions, the road to an awful mortgage application experience is paved with unclear intentions. Why do you want to buy a new home, and what will you do with your old one? What are your specific plans for the cash you're taking out with this refinance? Do you really plan to live in this new house as your primary residence, even though it's similar to your old house, which you're keeping to rent?
Lenders are primarily worried about fraud. For example, they don't want you to buy a house and say it's your primary residence so you only have to put 5% down instead of 25%. They may also worry that you're buying a new house that's cheaper than your current, upside-down home so you can bail on the old one. These were common tricks during the boom, but any housing professional who is still advising these kinds of tactics will end up on the CFPB's naughty list -- but the penalty for being on that list is likely to involve a subpoena, rather than a bag of coal.
Know thy credit
Credit scores of 680 used to get you the best rates and terms. Now you need to shoot for 740 or higher -- and even a high credit score is not a guarantee of approval. Be prepared to write a lot of letters of explanation about everything that shows up on your credit -- challenges in your history, new accounts you opened, and old addresses. Many new home-buyers don't know that mortgage lending requires a look at three credit scores, not one. Getting a "tri-merge" (a three-bureau credit score) costs $25 to $50, and it's worth the cost to know exactly what your scores are.
Show me the money...that you make
One paystub won't be enough. Two years' income history plus this year's earnings is the minimum standard. You now need all the pages of your tax returns, not just the first two pages. Any drops or increases will need to be explained by you, your employer, or both. Make sure you provide an employer contact to verify your job and income. Lenders will call at the beginning, middle, and end of the loan process to make sure you still have your job and nothing has changed before they release any money.
Show me the money...in your bank account
You will need to fork over every page of your bank statement -- even if it just shows vague information or copies of canceled checks. Any deposits on your bank statements that aren't obviously from a paycheck have to be explained and documented in detail like never before. If you add your retirement or 401(k) to the loan application, make sure you have the paperwork that shows how you can get that money before retirement if you need it.
Many customers are surprised they can't pick a company or person to appraise their house anymore. It's a random spin of the appraiser roulette wheel now, and you pay the $395 to $515 fee up front. You can't say anything to the appraiser to influence his or her "opinion of value." The laws about this are serious, too, and talking to the inspector is a big no-no.
Tell your story and back it up
If you've hit some hard times regarding your credit, your job, or your money in the bank, your loan officer should ask you to tell your story. Be honest, explain what happened, how things have changed, and why you believe you'll be able to pay back your new mortgage. Back it up with proof if you can.
Copies of doctor reports about the condition that led to a medical leave of absence, pay stubs showing the sudden reduction in hours that caused you to get behind on payments, the receipt for necessary home repairs that cleaned out your savings for a few months -- all of these will help support a convincing explanation and build a case for your ability to repay your loan.
All mortgage lenders are not created equal
What one lender thinks is risky may be no problem for another. Keep in mind that the more you ask the lender to be flexible, the more likely you'll be charged a higher rate or higher fees for the extra risk that you might not pay your loan back.
The loan process may seem intrusive and sometimes borderline absurd, but try to keep it all in perspective. If you're providing all of this paperwork to get a mortgage, so is everyone else. And if everyone else proves they can repay their mortgage, then you won't have to worry as much about foreclosures pulling down the value of your house in the future. Easy mortgage money got us into this housing mess. Maybe stricter lending standards will keep us out of another one. It's important that we all know exactly how to apply for a mortgage.