The last time my wife and I applied for a mortgage, about a decade ago, banks still offered low-documentation and stated-income loans. Those were products where you told the lender how much money you made, and very little, if anything, was done to verify what you said. We refinanced our mortgage a few years ago, and doing it through the Home Affordable Refinance Program (HARP) was almost as easy as the original stated-income loan we had used to initially buy the property.
Since the bursting of the housing bubble, standards have become a lot tighter, making loans especially difficult for self-employed people (as I have been for part of the last two years). Banks and other lenders want verifiable tax records, pay stubs (which in most cases they verify with your employer), and detailed documentation of any out-of-the-ordinary transactions.
Getting a mortgage in 2016 was nothing like obtaining one in 2006 -- the year when the bubble burst and everything changed. Our past home loan was obtained just under the wire when banks wanted to lend money and did not look too hard at a borrower's qualifications.
When we moved from Connecticut to West Palm Beach, Florida, we needed to borrow money to buy a condo, and we learned that the world has changed -- even for well-qualified buyers. Preparation matters more than ever, and there are things you should do to make the process go as smoothly as possible.
Know your market
Prior to purchasing in Florida, my wife and I had owned and lived in a co-op in Westchester County, New York, three houses in Connecticut, and a condo we had occupied for a decade in that state. New York and Connecticut have fairly similar mortgage policies -- though a co-op board is a hassle nobody should ever have to deal with -- but Florida banks and lenders have some very different rules when it comes to condos.
Because the state was hit so hard during the housing crisis, which began in late 2006, and many condo buildings went bankrupt, many mortgages on condominiums in the state require 25% down payments. It's possible to put down less if the building in which you're buying meets standards followed by the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac for condo mortgages.
Those rules, which require the building to fill out a long-form disclosure, require that a certain percentage of the building be owner occupied, and that no one person or entity own more than 10% of the units. There are also rules related to the building's finances, and many properties don't pass.
If you put 25% down -- something we had to do, but were not planning on doing -- the building only has to answer a more limited short-form disclosure. That can still result in problems -- for instance, our building faces pending litigation, which had to be explained to the lender -- but it's a less-stringent process.
Florida is a unique market, but lending rules vary from state to state, so it's important to know what to expect before you start. In our case, had we not had the money to put down 25%, we would have had to restrict our search to qualified buildings or stand-alone houses.
Get your credit score in order
Moving 1,300 or so miles down the east coast costs money. In our case, that meant renting a truck, and hiring movers on both ends to load and then unload. We also had to rent storage units in both locations as we waited to move into our new home while we sold our previous one.
Without considering the mortgage process, all of those expenses -- around $5,000 -- went on my credit card. Since I've never been a big fan of using credit to buy things, I had exactly two personal credit cards -- one with a $500 limit and the other with a $6,500 limit. By charging our moving expenses, I had pushed my credit usage into areas that damage your credit score. During our mortgage approval process, the broker we worked with, after running our credit, noted this, and asked me to pay down the card with the larger limit to around $300.
Doing that changed my credit score with each of the the three credit bureaus by between 40-60 points. That change got us a lower rate, and in some cases, could have been the difference between approval and denial. Of course, the whole situation could have been avoided if I had paid off the card right away, or had the foresight to increase my credit limit, or get a new card around a year before applying. (This was not possible in my case because our move was sudden and not entirely expected.)
Be ready to explain any red flags
Mortgage companies have always combed through at least two months of bank balances looking for any big changes, and they continue to do that until your loan closes. Basically, borrowers need to be ready to document any non-payroll money coming into their accounts, or any especially large debits going out.
In our case, we made a profit selling our house in Connecticut, and I received a profit-sharing check from a company in which I'm a partner. Our mortgage company required an explanation of where these funds came from, as well as copies of the checks. In the case of the profit from the sale of our house, we also needed the official closing document. That's something that's typically provided to you at closing, although you can also turn to your real-estate lawyer or real estate agent to see if they kept a copy that you can use.
In addition, because we rented the condo we are buying before we closed on it, we also had to provide documentation that we had paid a deposit and the last month's rent because those funds were being applied to our down payment. Because we had paid that amount via a certified check, the mortgage processor would not accept the record of the money coming from our bank account, or the assurance from the seller, a real estate agent himself, that he had the funds.
Instead, they wanted proof of the check, and we were lucky enough that my wife had taken a picture of it before mailing it, which the mortgage company accepted. That seemed silly when we showed the debit and the buyer agreed he had the money, but the people who are borrowing are at the mercy of those who are lending.
Be ready for anything
The lesson we learned during this process is that it's never too early to start preparing for getting a mortgage. We were lucky to have the funds to meet the unexpected 25% down-payment requirement, and we were also fortunate to be able to readily produce all the needed documents.
We worked with a helpful, friendly broker, who had a wonderful documents person who steered us through the somewhat challenging process. Still, had we known what was coming, we could have avoided a few white-knuckle moments where it seemed like things may fall apart.
Daniel B. Kline closed on his new condo on 10/14 after four hours of signing and waiting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.