Tom Dempsey is the Vice President of Business Development for Quicken Loans Relocation. Tom has 13 years of experience in residential mortgage lending. His experience ranges from working with internal clients on processes, technologies and systems to enhance the mortgage experience as well as an external focus on Business Development and growth of the Relocation Program. Tom was recently appointed to the WERC 2012 U.S. Advisory Council and the 2012 WERC Editorial Advisory Committee. In May 2012, Tom was awarded the Certified Relocation Professional designation (CRP) from Worldwide ERC.
I often hear that the mortgage process is like providing a DNA sample or having to be inundated with lots of paperwork. Those views intrigue me and I wonder: Is the mortgage process that difficult? What is the perception? How does that differ from reality?
Certainly the process is different from years past. It’s received a lot more attention these days and undoubtedly it’s more regulated. But is the process more difficult? To answer this question we need to take a look at how things were in the past, and how they are today. To do that, let’s use a little perspective – say 2008 versus today.
The mortgage and real estate landscape prior to 2008 seemed to be cruising along; however, there was continuous talk of a housing bubble. With respect to mortgage lending, the options seemed limitless and required very little investment and commitment from consumers.
Liberal qualifying guidelines had become the norm, not the exception. We saw expanded debt-to-income ratios (your percentage of debt versus your gross monthly income), sometimes as high as 55%, used to qualify for a loan. Certain niche products such as; No Income, No Asset (NINA), interest only, negative amortization loans, and loans with fancy names like Pick-a-Payment were very widespread in the industry. Down payment requirements seemed to go by the wayside, and zero-down financing was prevalent.
Additional factors played into the mortgage lending industry as well. Appraisal requirements and guidelines were not as stringent, credit score requirements were more favorable for consumers, and liquidity and private investment in the secondary mortgage market were present. These additional factors created an industry that; combined with liberal qualifying guidelines, made mortgage financing more available in the market.
Did these factors and guidelines make the process of mortgage financing easier? It may have created the perception that obtaining a mortgage was in fact, easier. In 2008 the housing and mortgage markets were purported to contribute to the largest financial crisis since the Great Depression. This crisis caused massive changes to the housing and mortgage industry. We have seen additional regulations, more scrutiny of information and tighter guidelines as a result. In the years following the financial crisis, did the process of obtaining a mortgage become more difficult?
In my opinion, it didn’t make the process of obtaining a mortgage inherently more difficult. It certainly created more awareness around the challenges facing the mortgage industry. Let me explain.
After the financial crisis, the lending industry experienced a contraction of credit. This meant the availability of credit was reduced, there were fewer loans options, economic conditions continued to deteriorate, and the outlook for borrowing seemed bleak. The industry struggled with defining a new standard to compete with the additional compliance and regulation. There were however some bright spots in the market. Low mortgage interest rates combined with the high home affordability created an opportunity for both consumers and lenders.
At present, economic factors such as high unemployment, consumers upside-down on their current mortgages (they owe more than the value of their home), credit challenges incurred by foreclosure and short sales, combined with a change in psychology of homeownership, have had a material impact on your borrowing ability. The effect may be you’re not in a position to qualify for a mortgage. It makes the possibility of obtaining a mortgage more challenging, but the process itself isn’t more difficult.
Mortgage qualifying guidelines were tightened. The high debt-to-income ratios are no longer acceptable, and most would agree that’s a good thing. Now, a debt-to-income ratio of 45% exists. Gone in large part from the market are the NINA, interest only, negative amortization and Pick-a-Payment loans. Zero-down financing (aside from VA loans) has become nonexistent as well. However, conventional financing with a 5% down payment, or an FHA loan with 3.5% down payment, is still popular for consumers.
In tandem with tighter mortgage qualifying guidelines, appraisal regulation has become more independent with a clear separation from lenders and real estate brokers. Many homeowners experienced a decrease in home values as the result of appraisals in declining markets being highly scrutinized. In May 2009, the Home Valuation Code of Conduct (HVCC) was created. The purpose was to eliminate constructive working relationships between mortgage lenders, real estate brokers and appraisers in the hope of obtaining an unbiased valuation on home appraisers.
You can still expect to provide W-2s, pay stubs and bank statements; most loan programs will follow the 2-2-2 rule – 2 years of W-2s, 2 months of paystubs, and 2 months of bank statements. Many consumers, depending on their borrowing profile and creditworthiness, may only be required to provide this documentation covering 1 year.
This is where I believe enhanced communication and the proper setting of expectations with regard to the mortgage process are crucial to success and to changing the perception that the process is more difficult.
Here are some of the changes that may have contributed to this:
- The documentation for loan qualification (provided by consumers to their lenders) requires a more thorough review, a deeper verification, if you will, into what is contained within that documentation.*
- Additional safeguards against misrepresentation and a more thorough sourcing of all loan application data are part of the process today.
When explained clearly and communicated at a high level by the lender, it creates and sets expectations for the consumer. Lenders can control whether the process is difficult or efficient.
Let’s use a bank statement as an example. First, we need to understand that a bank statement is the actual statement you receive from your bank or financial institution, not a printout from the Internet or a screen shot of the account. Secondly, as a consumer you need to be able to meticulously describe, explain and verify that the funds in your account are yours. Finally, being able to verify your funds over a period of time, generally 60 days, is important. Non-verifiable funds, such as a cash deposit into your account or “mattress money,” will be scrutinized more during your process.
I’m not advocating that the mortgage process is either relaxed or challenging; each loan can present unique situations. I’m proposing that the process for mortgage lending is defined, regulated and precise. Because of this, the process the lender defines for you, as a consumer, can alleviate the stress and be more efficient. The lender can improve your experience with your active engagement in the process.
Future government regulation from Dodd-Frank will require that lenders be on top of their regulatory and compliance responsibilities. Those that are on top of these changes will continue to create a process that’s efficient for consumers.
And those that don’t? Well, perhaps they’ll say the mortgage process is not easy. But until then, know that you and your lender can control your experience and your process, and it doesn’t have to be difficult.