2014: Changes to Mortgage Law Means Buyers Need to Do More

Recently I saw a webinar explaining the changes to the laws surrounding mortgages starting n 2014. I'm not a mortgage broker, financial expert, lawyer, or politician, but this is what I took away from the session.

As part of the response to the housing crisis of 2007-2008, Congress developed a set of laws to protect against mortgage fraud and to prevent consumers from being manipulated into mortgages the can't afford by "unscrupulous lenders." The reality is, your local bank or branch has no reason to write a "bad" loan. They want their repayment with interest and happy customers. But there were a few people out there engaging in unethical behavior, and so the laws have been tightened for everyone. And the crisis we went through had a lot more to do with Wall Street, inflated appraisals, and insurance fraud, which is about is much as I understand.

The optimist in me says that while mortgages will be harder to get, homeowners will benefit by getting loans they can afford and homes that are more realistically appraised. Government program to help lower and middle income families will continue. But getting a mortgage will require better credit, more paperwork, and more time than ever. A pre-approval will be the critical item each person will need before looking for a home.

Here's what you need to do to protect yourself in this tougher mortgage climate. It's the same advice as always, but it's more important than ever.

Better Credit

Check your credit report.  You are entitled for one free report from Experian, TransUnion, and Equifax. Do you have outstanding collections? Are there inaccuracies? Try to get them cleared.
Personal experience has shown that this is easier said than done, but it is worth the effort.

Pay your bills on time. It seems so simple, but life is busy, things happen, and sometimes bills get overlooked. Buy a calendar, set up an alert on your smart phone, have a special place for bills, and set up emails if necessary. This will take time, but each month that everything is paid will add a few points to that score.

You should not have to pay for your credit report or to clear errors that you find, in my opinion. I'd put those dollars aside for a down payment.

Proper Documentation

Different lenders may have different requirements, but there are certain documents you'll definitely need, and gathering them together a little at a time is easier than scrambling to find them when you're ready to apply for a loan.

You will need income tax returns, and since the federal government requires you keep these records for seven years, you might as well have all seven in one place. The banks probably won't need this many, but you are covered if you do.

Gather your pay stubs. The requirement used to be two pay stubs, but no one knows what the new requirement will be. I find a shoebox is great for stashing them away.

Build Up Your Down Payment

There are times when if might makes sense to take advantage of a government program that requires 3.5% or less down, but just because you have this option doesn't mean you have to choose it. A higher down payment will save you interest since you'll be buying a portion of the house interest-free while probably getting a lower interest rate for a conventional mortgage. And at the proper loan to value ratio (the magic number is usually 20% down), you won't need to pay for Private Mortgage Insurance, which protects the banks should a homeowner default.

Interview Lenders

Different lenders will have different requirements for pre-approval. Remember as you meet lenders that they are not the people who personally approve your loan. Loans are approved  or denied by underwriters. (I've never seen one, but I always imagine them working in tall glass skyscrapers in front of sophisticated computers which have more information on every person in this country than the U. S. Government.) Be ready to go to several lenders, and don't give up. Just like your real estate agent, you want someone who will work hard to meet your needs.

Then Interview Real Estate Agents.

If you live in central Indiana, I'd be honored to help you.

It might take longer than it used to, and there may be more hoops to jump through, but when find the right home for you, it will all be worth it.