Getting a Mortgage After the Meltdown
August 10, 2011
By Robert Steinberg, Esq.
Getting a mortgage and/or refinancing in today’s economic climate can be a challenging and exasperating experience for many individuals. In the days before the mortgage crisis, when mortgage money was plentiful, many people were able to obtain a mortgage with less than stellar credit and little or no documentation to justify their ability to pay the mortgage. Of course, this practice was a major contributing factor in creating the mortgage meltdown, since many of those same people were not actually financially able to pay those loans.
Today, however, the process of obtaining a mortgage has become much more difficult. Mortgage companies frequently ask for extensive documentation in order to qualify a mortgage, including W-2 statements, several months’ paystubs, tax returns and bank statements. The mortgage company may verify employment and check references from landlords. And if your planned move seems unusual, or you already own a home and are moving to a new home, you may even be asked to write a statement explaining your reasons for moving. While some of these requests may seem highly invasive and unnecessary, it is by now very clear that mortgage companies in the post-meltdown era have become extremely cautious about extending credit.
In addition to using a more extensive and invasive income verification process, mortgage companies have also made the appraisal process more conservative. Mortgage companies can no longer select or influence the appraiser, which practice previously led to inflated appraisals. While this lends more integrity to the appraisal process, it also places another hurdle between potential home buyers and a mortgage, because appraisers under pressure not to inflate values tend to be very conservative and a low appraisal can affect your transaction.
A more conservative appraisal process poses particular problems for FHA borrowers. A large percentage of loans being issued today are government-insured FHA loans, and FHA rules stipulate that the property must appraise for the purchase price otherwise the buyer may terminate the deal. This could result in a reduced sale price to match the appraisal in order to avoid termination of the agreement. Even if you are not getting an FHA loan, it may be advisable to include a contingency in the agreement stating that the agreement is contingent upon the property appraisal.
Despite the tighter rules in the post-meltdown economy, it is still possible to get the mortgage you need to purchase your dream home. But success takes work, and smart borrowers should consider taking a few steps up front in order to avoid disappointment later in the process.
Here are a few tips to consider before getting started:
- Check your credit rating to make sure that there are no surprises on the report that may lower your credit rating. A healthy credit rating is essential to your loan approval and the rate you will get.
- Make sure that your bank statements appear ordinary, with no unusual entries. The mortgage company may ask for an explanation for any unusual deposits made in your account and will want to see that you have the necessary funds on deposit to close. The mortgage company will want to make sure that you did not borrow money in order to purchase the home which is not allowed. This is different than an outright gift which does not require repayment.
- Get prequalified by a bank or mortgage company, if you are buying a home. Keep in mind that a prequalification letter is not the same as a Mortgage Commitment, which is generally issued by the mortgage company after you are under contract and after the appraisal of the property has been performed. But a prequalification letter is a step in the right direction.
- Provide all documentation to the mortgage company in a prompt manner, even if your processor seems to have asked for the same paperwork before.
- Make sure your real estate professional presents you with several comparable sales completed within the last six months, so you can have a fair idea if your offer price will be supported by your appraisal.
Despite the new hurdles posed by the tightening home mortgage market, it is still possible to secure a mortgage and purchase a new home. It just may require a little more time, effort and perseverance.
The real estate attorneys at Willig, Williams & Davidson can help you navigate the complexities associated with buying a home in the post-meltdown era. For more information about the mortgage process, or about buying or selling a home, contact Willig, Williams & Davidson and ask to speak with one of our attorneys.