Based on what my REALTOR® friends tell me, getting a mortgage these days requires a ton of paperwork to prove that everything you said on your loan application was true. Did you really make the income you claim? Do you really have that much money in the bank? Can you prove you really did pay off that auto loan last year?
So when the top lenders mentioned during a panel discussion at the NATIONAL ASSOCIATION OF REALTORS® conference in San Francisco last week that they plan to get a little tougher about proving your income, credit, and debts when new federal mortgage lending rules go into effect come January 2014, I had to wonder, what’s next? Are they going to come over to your house and look in your underwear drawer?
The New Lending Rules: Qualified Mortgages
The new rules they were discussing, called the qualified mortgage or ability-to-repay rule, protect consumers from unscrupulous lending practices and provide creditworthy homebuyers with access to safe mortgage financing. That mean lenders must look deep before making a mortgage loan.
Lenders can still make any loans they like, but if they go outside the qualified mortgage rules, they lose protection against borrower lawsuits claiming that the loan was unfair or inappropriate. Many lenders have faced lawsuits filed by state attorneys general and class actions over loans made before and during the housing crisis.
To make a qualified mortgage, the lender will have to follow exact steps to prove eight things beginning in 2014:
1. Your current income or assets.
2. Your current employment status.
3. Your credit history.
4. The monthly payment for the mortgage.
5. Your monthly payments on other mortgage loans you get at the same time.
6. Your monthly payments for other mortgage-related expenses, such as property taxes.
7. Your other debts.
8. Your monthly debt payments, including the mortgage, compared with your monthly income and how much money you have left over each month after paying your debts.
All those checks will make it harder for some people to get mortgages, especially first-time homebuyers, Bill Emerson, CEO of Quicken Loans told the REALTORS®.
Kevin Watters, CEO of mortgage banking for JPMorgan Chase, agreed that low- and moderate-income buyers, as well as self-employed buyers who don’t have a consistent flow of income, might have a tougher time in the new lending environment. “We need to work together to help first-time buyers into affordable housing options,” he said.
Cash vs. Mortgage
The new guidelines worry REALTORS® who see homebuyers who use a mortgage being passed over by sellers who accept offers from cash buyers (most cash buyers are investors and about one- third of recent existing- home sales involved investors).
I can’t blame sellers for taking cash deals. If I were selling my home, I might not want to wait for a buyer to go through a lengthy mortgage approval if I could quickly close the deal by accepting a cash offer from an investor.
Will It Take Longer to Get a Loan?
Since the rules aren’t in place yet, we won’t know how long it’ll take to process loan applications using the qualified mortgage until after January.
In the meantime, NAR President Gary Thomas asked the bankers how long they’re currently taking to approve a mortgage. Matt Vernon, home loan sales executive for Bank of America, said that in California, Bank of America’s mortgage loan officers can process and approve loans in 16 days.
Emerson didn’t answer as directly. “Our mission is to get someone approved,” he said. “With clarity and transparency, buyers will know exactly what’s needed of them. We want to do this in a manner that’s as stress free as possible for consumers.”
Mike Heid, president of Wells Fargo Home Mortgage, added that Wells Fargo is using new technologies to create learning tools to help consumers prepare to be homeowners, even before they find the house they love.
Regardless of whether you apply for a mortgage now or after the qualified mortgage rules start, your best bet is to:
Assume the loan process will be slower than the last time you got a mortgage, so don’t let it stress you out.
Make a copy of every piece of paperwork you give to your lender. That way, if you’re asked to send it again, you’ve got it ready to go.
Discuss lender choices with your REALTOR®. She’s watching local people go through the mortgage application process every day and knows what lenders are really doing versus what their loan officers say they’re doing.
Don’t lie on your loan application. All the new verifications mean you’re just going to get caught and then you won’t get your loan.
So, How Will Housing Markets Fare in 2014?
The lending leaders unanimously agreed that next year consumers will see even healthier markets, keeping pace with gains made in 2013. Mortgage originations will dominate the 2014 housing markets as interest rates creep up and refinancing trends downward.
Heid said that while home values will continue to increase as the market continues to heal, the economy is the wild card and a downturn would be game changer. “In spite of the economic crisis, Americans still want to be homeowners. That hasn’t changed one bit,” he said. “Homeownership is at the heart of what we do and that’s worth preserving.”