What To Plan For Home Loans In 2014
Its not sexy and its not glam, but its important for anyone buying a home going into 2014 understand the mortgage environment and what to expect during the loan process.
Just a few short years ago the home loan industry was a mess. No sense going over all the bad that happened but, it’s important to remember what contributed to the housing bubble (and burst) and the mortgage crisis that left a path of destruction bigger than hurricanes Katrina and Irene, combined.
Zero oversight in mortgage banking; it was like the Wild West and we all had six-shooters. Metaphorical? Yes but altogether true. Pretty much anyone of legal age could get a loan. You didn’t need a job, you didn’t need money for a down payment, and you could have marginal credit. The question wasn’t whether you could qualify for the loan (because the entire mortgage industry didn’t care), it was more about what type of loan you would receive and what the rate would be.
Fast forward to the next chapter “After the fallout.” Mega-regulation and stringent oversight. In many ways this is good that there are “mortgage police” ensuring that responsible lending is taking place but there’s some bad that comes with this too. Anyone who has gone through the loan process over the past few years may have experienced “the bad.” Mortgage banking appears completely irrational when it comes to documenting loans. One could call it being “conservative”, while others might say “prudent.” Whatever you call it, it’s still more work for borrowers.
Borrowers are now mandated to show their ability to repay the loan by verifying their income (nothing wrong with this). They are also required to show where funds are coming from for down payment and closing (nothing wrong with this either). However, the mortgage process is now heavily tasked with a second, third, and even fourth level of verification.
From a borrowers stand point it is important not to get caught with any financial surprises. Banks love to see stability with a borrowers bank accounts and financial ability to purchase. Keep in mind there are a long list of costs when buying a home. It is super important that you are familiar with the whole buying process and the myriad of potential fees you will encounter. While a home will have a purchase price of “X” the net cost of what you will pay is actually a lot different once you account for all the extra expenditures. Look at the guide that will take you through the process of a home purchase and the expected outlay of funds.
Expectations
Expect to show your income. Lenders want to know exactly what you make on a yearly basis. Expect to provide pay stubs, w2’s and possibly tax returns. In addition, if you had any ancillary income through a second job, a partnership, a consulting gig, etc., over the past few years you may be asked for a letter from your CPA explaining the income, a copy of your business license, proof you are incorporated with the state, and possibly partnership and corporate tax returns, and more.
Expect a second level of verifying your income directly from the IRS with the IRS form 4506-T that all borrowers are required sign. The 4506-T gives the IRS permission to provide the mortgage company with transcripts of your filed tax returns for the past two years. Be ready to provide additional supporting information if there are any discrepancies or anomalies with your transcripts.
Expect another level of verifying your income with a call to your employer to confirm your position, start date, rate of pay, etc. Most companies readily comply but occasionally there are obstacles with employers HR or payroll departments and the borrower might be called upon to help pave the way to have their information confirmed.
Ready for this? Expect ANOTHER verification of your employment three days before your closing. Absurd? Maybe. Required? Yes. At the time the bank or lender is preparing your closing documents they will also be contacting your employer (again) to re-confirm that you are still employed at that rate of pay, same position, etc., etc., etc. There have been instances of borrowers leaving their employment or being terminated after the loan process has started so all lenders require this last minute check. These are all part of the loan process. As a buyer entering the real estate market for the first time it makes sense to be prepared when getting a mortgage. What you do before your home purchase is a vital part of the whole process going smoothly. A well prepared borrower is the type of client lending institutions like to see.
As a borrower, it’s your responsibility to let your lender know of any job changes during the loan process. If you don’t think the bank will find out about you losing your job or changing companies, think again.
Moving on… Credit
Expect a credit report to be pulled and lenders to take note of any inquiries that appear. An inquiry is when a creditor (with your permission) checks your credit. This will occur for the likes of a car loan, credit card, in store charges, even for opening a bank account. The banks require the borrower to explain all inquiries and provide documentation if any credit was extended as this could impact the borrower’s ability to qualify for the mortgage.
Also expect another credit check within a few days of closing. This will confirm that no new debt was incurred during the loan process that could impact a lending decision. If you are a borrower, state the following, “I will do NOTHING with my credit from the time I apply for the loan until the day after my loan closes.”
Loan closings have been postponed and even cancelled because the borrower made a large purchase on credit, consigned for a student loan, bought a pile of new furniture for their new home, and the list goes on. Oh, and if you do decide to buy a car at the same time you are buying a house, please tell your lender. If you don’t, chances are good that you could find yourself sleeping in it.
If you do need to use your credit for any reason during the loan process then please just call your loan officer and discuss your plans. Chances are there is a way to work out whatever you are looking to do.
And Finally, Funds To Close
Expect the bank to drill down and verify all of your funds needed for closing during the loan process. They will also require that if you have investment accounts that you are planning on using for closing then you will be required to show that you have liquidated those funds and transferred them to your bank prior to the closing.
Be prepared to source any and all large deposits that show up on your bank statements, if not readily identified. If deposits show up from your employer as payroll then no problem. However, if you transferred money from your old college graduation account that’s still In mom and dad’s name, those funds will have to be verified.
To take it a step further… Not only do the banks verify you have enough money in your accounts to close, but they will also require you to show that you used the funds from those specific accounts at the time of closing. If you provided your bank statements from your savings account with Main Street Bank and then take a check for closing from another account that you did not show during the loan process, this will postpone your closing until the funds used are verified.
No one can predict all of the circumstances that may come up during the loan process but you can now be better prepared to navigate through the home loan maze. And, some good news… We are starting to see some signs of common sense coming back. As the banks now require verifying everything down to your DNA, the industry, as a whole, is beginning to loosen up a little. We’re not where we need to be but it looks as though things are now moving in the right direction.
How About Mortgage Rates?
One last word of advice – at the present time it looks like mortgage rates in 2014 will be heading higher. All indications are the Federal Government is going to stop adding liquidity to the market and the bond buying program that has been in place may not last much longer. If this holds true and there are no other strange events that affect mortgage rates you can almost be certain getting a loan be more expensive. While this may not happen in the first quarter of the year, look for rates to inch higher as we move forward into the year. Unless there are some unforeseen issues in the economy or the stock market chances are rates could be higher. If unexpected trouble arises then all bets are off and rates are likely to stay lower for a while.
So if you have been thinking about purchasing a home now is the time to get serious and call a Realtor. Holding off buying a home is only going to get more expensive in the future. If you ask any Real Estate agent I am sure they will tell you that homes going up for sale in the Spring time command top dollar as there is far more demand for housing at that time. Jump on board now while rates are still super low and there are fewer buyers in the market!
This article comes to you from Author Mike Dunsky. I have been using Mike for all of my buyers home loans for the past fifteen years. I would highly recommend Michael as he does an outstanding job at communication and provides competitive mortgage rates. Michael Dunsky can be reached at Guaranteed Rate, Inc which is located at 38 Pond Street, Suite 208 Franklin, MA 02038. You can reach Michael by phone 508.528.1800 and email at Michael.dunsky@guaranteedrate.com
The above Real Estate information on what buyers can expect when getting a mortgage was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 33+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.
Bill, great article and truly more RE Agents need to get informed and trained by LICENSED Lenders, not Registered Lenders, big difference in my world that they trust. We are in final stages of proper training prior to these new rules but the reality is going to be tough for some buyers. Here are my 2014 observations;
-Slower Closings as more institutions that cannot afford the software necessary for back door audits and checks will only require more time reviewing for a Secondary Review. Mostly smaller volume mortgage companies and local banks I feel will be victims to this practice.
-Interpretation amongst different companies will vary on the ATR Rule on some cases so best make sure where you land for your mortgage you are dealing with PROFESSIONAL Surgeons and not Residential INTERNS.
-Some clients/realtors will need to know what institutions will do QMs and NON QMS that means in the event ones client needs to move to a NON QM Loan then if the landed at a QM ONLY Mortgage Company they are stuck or will have to start over.
Very informative article Bill. I agree with you that although there is still work to be done as a whole we are moving in the right direction. I’m so thankful to see a little more “common sense” as you say in the lending process. Yet, I’m not excited about the many headaches I foresee in 2014 while walking with clients through the new regulations. I’m preparing for the worst hoping to be pleasantly surprised.
Planning to buy a home in 2014? Well, then you will have to remember that various rules are coming into affect in this year. These rules might make things difficult for a borrower. Two of the major rules that are coming into affect are the ability-to-pay and qualified mortgage rules. You should also note that qualified mortgage rules will not have minimum down payment requirement or credit score requirement. Also, there will be certain specific clients to whom the interest-only loans will be available. Apart from this, there is also an ongoing discussion on reducing Fannie and Freddie high-cost limits to reduce the government’s domination of the mortgage market.
Dear Bill,
You are truly a Real Estate professional and what every Realtor should aspire to be like. I wish you were in the Pacific Northwest but alas, you’re not so I will have to just enjoy your well written and informative articles. You are correct that everything in the mortgage business has changed and is continuing to do so as the industry figures out how to comply with the Dodds-Franks act.
One thing that you did not mention is that not only should consumers not expect obtaining a mortgage to be like is was a few short years ago but REALTORS. I am constantly hearing from Realtor’s “thats not the way it was previously, I have never been asked to provide that before, In the past we always used to be able to do it that way”. Those kind of comments make us lenders roll our eyes back in our head wondering when was the last time this Realtor sold something?
Steve – believe me I know what you mean as I have to deal with some of the incompetence myself. The barriers to getting into the real estate industry are way too low.