Are your Buyers feeling Scrutinized by Lenders?

Buying a home is a more difficult process than it was a few years ago. Real Estate Agents and their Buyers are starting to question all the documentation and paperwork that goes along with the mortgage process.  Some people accept the changes in the process while other still long for the old days where the process was less regulated.  I feel the need to explain the change and communicate what it truly takes to get a mortgage in 2015.

You are probably aware of the reputational damage done to the Nation’s Primary Lenders, Fannie Mae, Freddie Mac, and FHA in 2009.  (For the purpose of this article, we will refer to them collectively as “FFF”) which has resulted some of the new procedures I will discuss in more detail.

To help Buyers understand the process, I need to explain where the money comes from to fund a mortgage.  All funds ultimately come from the FFF.  A Mortgage Broker or a Bank takes an Application and submits the loan file directly to the FFF for an Automated Underwriting (“AU”) The AU is based on Uniform Underwriting Standards that are in place to protect a Borrower from any discrimination. The AU system does not care where the property is located, the borrower’s race, or consider any of the protected classes in Fair Housing, but does follow uniform guidelines for approval.

The system generates the AU findings and the Broker/ Bank then requests Documents from a Borrower based on the AU findings.  We informally call this “Round 1”. We then collect the initial documents from the Borrower and then have them sign over 20 different forms, so we can submit the loan package to an Underwriter.  

Once an Underwriter reviews “Round 1” documents, they issue an Official Approval.  This approval is not final because it is impossible to collect all the documents in the beginning of the process.  Moreover, to prevent material findings, the underwriters will verify assets and employment one last time before the loan is closed.   You would be surprised to learn that some borrowers spend assets on items such as furniture and do not have enough to close a loan or suddenly get laid off in the middle of the loan process.

It is understandable that items such as the Appraisal and Title Insurance are completed after inspection.  There is an order to the process and it is also important to realize it is a continuing, and ever-evolving process.  It is extremely common to receive requests for Letters of Explanation after the underwriting team reviews bank statements. It is impossible for Bank/Brokers to know what will be requested after Phase 1 and need to wait for the first review.

While the Underwriter continues to run reports internally, they will issue a Commitment Letter.  In the industry, we consider this the Formal Approval because FFF is committing to doing the loan.  It also means that the loan passed the fraud test and passed CAIVRS and a Full Factual Credit Report. Borrowers are ready to move into Phase 2.

Phase 2 is normally received by the Borrower with a combination of excitement and nervousness.  Commitment Letters are filled with acronyms and financial lingo.  Normally a Broker / Banker will share the Commitment Letter with a Borrower and Realtor.  However a good Broker/Bank will also explain (in plain language) what items are needed from the Borrower, from the Realtor and which items can be secured through third parties. 

Once Phase 2 items are submitted, is when a Borrower often really feels nervous because each day the closing deadline is getting closer. Phase 3 requests are the questions a Lender has after reviewing the Phase 2 Documents. The FFF requires Letters explaining large deposits and verification of where the money came from or they look for additional debts showing on a Bank Statement that are not listed on a credit report from Phase 1.  These requests can range from a full factual report because of additional real estate the Borrower may own (Not sure how borrower “forget” to mention they own other properties) to another copy of a bank statement because a blank, numbered page was missing on the Phase 2 Documents.  To be fair, the Underwriter cannot confirm a page if blank if they do not have a copy.

So I think we can safely agree it’s the Government’s fault J. Joking aside, what is the intention of these requests from the FFF? Their intention is to protect Investors, Tax Payers and the Borrower.  It is a fact that over 16% of the Applications involve fraud or dishonesty. Fraud can potentially cause damage to Investors and Tax Payers.

If you feel like it is hard to get a mortgage today, you are not alone.  “If someone is saying that it's harder to get a mortgage today than it was at the height of the boom -- when there was no income documentation requirement -- yes, of course it's harder to get a mortgage today than it was at the height of the insanity," says Bob Walters, chief economist at Quicken Loans.  However, that does not mean it is impossible to buy a house in 2015. The current perception that it's "extraordinarily difficult" to get a mortgage, when in reality, “borrowers have no problem getting one when they have stable incomes, some equity or down payment, and decent credit scores” according to Walters.

So why is there a perception that it's so difficult to get a loan?

Borrowers have to jump through more hoops to get a loan these days, says Pava Leyrer, president of Heritage National Mortgage in Grandville, Mich.  "The scrutiny that goes into a mortgage now is much tighter," she says. "There are great-credit borrowers that are having to jump hoops, and it's a matter of how many hoops and whether or not the underwriter lights them on fire or not." Leyrer confirms one common hurdle homebuyers face when getting a loan is when lenders question "unusual" deposits in their accounts. A mere transfer from the borrower's savings to checking account or a cash gift from Grandma can be viewed as a red flag by the lender. That's especially true for loans backed by the Federal Housing Administration, or FHA loans.

Unless it's a direct deposit from your employer, lenders generally want you to show the source of any large deposits to ensure you are not relying solely on gifts or borrowed money to qualify for the loan.  What is considered a large deposit? It depends on your income, but some requests are almost laughable to borrowers who had to prove a $500 birthday check really came from his grandparents.

If you take a bird’s eye view, there is no question borrowers have to provide more documentation these days. While the tight documentation requirements can be a hassle, they don't necessarily prevent the borrower from qualifying for a loan and in my opinion it is more of an inconvenience, as opposed to a true hurdle to getting a mortgage.  My advice is remember applying for a mortgage is a continuous process.   Be organized before you start and finding those documents as they are requested will become less inconvenience and by no means considered a true hurdle to home ownership.