Connecticut investment adviser Peter Nagle bought a vacation condo in Oahu, Hawaii, in 2010 and had no trouble getting a mortgage from a local bank. But the process of trying to trade up in the same condo development, he says, was “like night and day.”
Despite a pristine credit report, a seven-figure income that's more than enough to satisfy even the most conservative debt-to-income ratios a loan originator could conjure up, and being ready to plunk down a 25 percent down payment, Nagle waited two and a half months for his deal to close. Along the way, he was peppered with an endless stream of document requests. “It felt like they were trying to figure out if I was a criminal or something,” he says.
Nagle had to explain an $1,800 check he wrote six months ago. Then the problem was a $36,000 deposit Nagle made into his checking account. “I stupidly didn’t think it would be a problem if I sold my Porsche,” he explains. A copy of the check and a notarized bill of sale weren’t enough documentation. Nagle had to provide a copy of the car title showing he'd transferred ownership. “It's absurd," he says. "None of the requests go toward increasing the security of the lender.”
The document gauntlet
Nagle waited only about half as long as Scott Thompson. Last December, Thompson applied to refinance a 4.75 percent, 30-year fixed-rate loan for $337,000 for his family’s 4-bedroom, 2.5-bath colonial in a northern Philadelphia suburb.
The problem is that Thompson is co-owner, with two brothers, of a small manufacturing firm with $22 million in annual revenue. His initial application was turned down because his share of the company’s debt, which is fully secured with company assets, was added to his personal debt. His share of the company’s $5 million equity was not counted as an asset.
The firm’s finance head and the outside accounting firm have had to provide signed and notarized statements that the business debt is in fact secured.
“I am not under water, my credit is good, I have never been late with a payment and I am not looking to take equity out,” says Thompson. "All I want to do is reduce my mortgage payment from $2,450 to $2,150. That’s actually improving my finances.” He has reapplied with a different lender.
Welcome to the wacky world of getting a mortgage post-crisis (let's be hopeful). Stories of deals hitting snags or falling apart due to low appraisals are so 2011 -- though that still mucks up plenty of deals. If you want a chance of grabbing a sub-4 percent mortgage the latest challenge is being prepared to run the document gauntlet and become a supplicant to the underwriting gods.
“I prepare my clients for the horror show they are going to go through,” says Kathy Godin, a branch manager at Cross Country Mortgage in Raleigh, North Carolina. “If you are private and don’t want to provide everything that is asked for, you won’t get a mortgage.” Jack Pritchard, chief operating officer of The Mortgage Professor, an online mortgage information and shopping site, likens it to oral surgery. “If you emerge from the process with just one tooth pulled, not three, you’ve done well.”
Lenders typically want to sell loans they originate in the secondary market; Fannie Mae and Freddie Mac are the big buyers. In the wake of the real estate bubble, Fannie and Freddie have gotten serious about reviewing loan files for mortgages that have gone sour. In the event there is a default down the line, and Fannie or Freddie can find any improprieties in loan documentation, the mortgage can be transferred back to the lender. That has had a sword of Damocles impact among lenders. Their response: To put the mortgage process into documentation overdrive. (Insert your own “my how the pendulum has swung” eye roll here.)
Sep Niakan, a real estate broker in Miami, suggests the first step is to ask friends, colleagues and real estate agents for intel on lenders that are closing deals. “It’s one thing to see a great advertised rate, but what matters is working with a lender that is closing deals, and closing them in a decent amount of time.” Niakan and other real estate pros recommend checking out smaller community banks and credit unions, where there can be a more human touch to vetting applications than at the local branch of a big money-center bank.
Next comes putting on a great application face. Ellie Mae, a provider of technology systems for the mortgage industry, says the average conventional mortgage for a purchase that gets approved these days is for a borrower with a FICO credit score of 764. The average score for approved refinancings is two points higher. (FICO scores range from 350 to 850.) According to mortgage data provider CoreLogic, the average FICO score for conventional mortgages 10 years ago was 710.
While FHA-insured loans are a viable way to get in with a low down payment -- though you end up paying for that insurance -- if you plan on going the conventional route, Ellie Mae says the average down payment for purchases is 21 percent and equity of 28 percent for refinancings.
Lenders will also compute two debt-to-income ratios. Among approved conventional mortgages recently, the monthly mortgage cost was 21 percent to 23 percent of gross monthly income. The monthly payment as a percentage of household debt was 33 percent.
Ready, set, document
Once your application is approved, the real fun begins. You will be presented with a laundry list of documentation needed to get you to the closing. Mortgage pros say it's common for lenders to wait for every piece of requested information before they order the appraisal.
The Mortgage Professor's Pritchard suggests that even before you start the process you have a basic document file ready with:
Three years of tax returns. The whole megillah, not just the first two pages. While Fannie Mae guidelines require only two years, Pritchard is running into lenders asking for more. “Every lender can have their own overlay of requirements, above what Fannie and Freddie require,” he says. Lenders will verify your reported income with the IRS.
Two months of bank statements. Every page, front and back.
Your most recent retirement and brokerage statements. Again: every page.
Two most recent pay stubs
Your homeowner’s insurance proof-of-insurance with a contact number for your agent/insurer
Your first-born son (ha)
Self-employed? In today's mortgage circles that’s pretty much branding you with a scarlet SE. Lenders will ask you to jump through extra hoops. Pritchard has seen situations in which successful doctors and lawyers have had trouble qualifying for a low-rate mortgage because lenders ignore their gross receipts and instead focus on taxable income. If they have a good CPA, taxable income could be a lot lower. In those cases, the workaround can be to find a lender who will agree to a slightly higher, though still competitive, rate for a loan it intends to keep in its own portfolio, rather than sell in the secondary market.
No sudden moves
Putting your financial life into a state of suspended animation is what the lender most wants while you are waiting for the loan to close. As Nagle found out with his Porsche sale faux pas, any sudden financial move between approval and closing will trigger a round of document requests and delays. Any deposit or withdrawal of more than $1,000 from your bank account that isn’t clearly wages or another income source will raise a yellow flag that will require explanation.
Once you make it to the closing and sign on the dotted line, don’t exhale just yet. There can be one last sweep of your file to make sure everything is kosher. Godin says one client was approved for a loan on the stipulation he pay off a few credit-card balances and close the accounts. He paid off the balances, and the mortgage closed. The next day the lender discovered that he hadn’t shut down the credit-card accounts and threatened to nullify the mortgage. The client closed the accounts, and his mortgage closed. For real.