Big Changes For Home Lending, by Carrie Benuska, San Marino Real Estate

Big Changes For Home Lending, by Carrie Benuska, San Marino Real Estate

The San Marino Real Estate Report, as seen weekly in the San Marino Tribune

Not too long ago, almost any American could get a home mortgage, even if the individual could not realistically afford the monthly costs associated with the loan.  Those were the days when banks would give loans based only on stated income data (no bank statements or tax returns required).  Lenders were pumping out mortgages at warp speed, and many in the industry were experiencing huge profits.  Property values were increasing, so homeowners were also allowed to repetitively refinance their personal residences.  Many chose to pull cash out of their house each time they refinanced, which reduced the amount of equity they had in their home and increased their loan amount.

Banks also began to offer a product called a sub-prime mortgage, a loan that featured an extra-low initial interest rate to borrowers with less than stellar credit.  After a specified period of time, the interest rate on these sub-prime mortgages sky-rocketed to an elevated level. The artificially low initial rate lulled many buyers into believing they could afford a home that was in fact outside of their range. Some buyers were even allowed to borrow 100% of the value of the home.

The old English proverb states, “All good things must come to an end,” and this is exactly what happened to the home mortgage business.  The first wave of sub-prime mortgages made their painful adjustment to the escalated interest rate.  Many of these homeowners were unable to handle the increase in their housing costs and began to default on their loans.  This began a tidal wave of short sales and foreclosures, which translated into a mountain of losses for the banks.

The magnitude of the losses experienced by banks was so great that the mortgage crisis turned into a national banking crisis, which included the failure of a few of the nation’s prominent investment and commercial banks.  The bank losses also translated into economic ruin for many Americans.  Clearly, things needed to change in a drastic way.

Today’s home lending environment is vastly different from the heyday of the early 2000’s.  Banks have tightened their lending guidelines, require a mountain of documentation, expect good credit, and have added extra layers of review.  Getting even a simple and clear-cut loan funded can be a painstaking process.  After the loan has been “approved,” banks often continue to barrage the borrower with additional conditions, which require them to produce even more documentation.

If the potential buyer is self-employed, the process is even more difficult.  These individuals need to prove an established history of profits on the business that support the proposed mortgage payments.  If the business is new or the expenses posted for the business cut too far into profit figures, the bank will not even consider making the loan.  Multiple years of tax returns need to be submitted, in an effort to ensure that every “i” is dotted and every “t” is crossed.

Buyers and sellers alike need to realize that all of this due diligence takes time.  The purchase agreement automatically provides a 17-day contingency period for the buyer to attain loan approval.  It is unlikely that the process can be completed any quicker than than the stated period, and it is not unusual for loan approval to take well beyond 17 days.  If a borrower is getting a jumbo loan or is self-employed, all of the parties involved should prepare themselves for a long wait.  According to Steve Detrick of Detrick Mortgage Group, today’s home lending environment presents buyers and sellers with a realistic truth:  “The loan contingency in not over until the loan has funded.”

As a level of protection against excessive delays, sellers should ensure that a potential buyer is pre-approved rather than just pre-qualified before entering escrow.  Pre-approval is a more extensive process and will decrease the work necessary to get the loan approved and funded.  Buyers can also aid the process by going as far as possible with the lender before making an offer.  Getting a jump on the lender requirements will reduce the level of tension during the escrow process.