Mortgage Approvals Update: New Rules Mean More Paperwork

Do you really need to show your mortgage broker a marriage certificate to prove that extra cash in your bank account came from a legitimate source?

Yes, if you want to be sure your mortgage application will be approved.

This is just one type of documentation prospective home buyers should be prepared to produce as they negotiate the new rules of the mortgage application process.

Adhering to these new rules means prospective homebuyers should prepare themselves for the long haul when it comes to getting approval for a mortgage.

Of course, these new rules are really the old rules just being enforced, says Todd Huettner, a mortgage broker in Denver. "Most borrowers don't know what a full loan looks like. If you purchased a house less than 10 years ago, you didn't do a full loan application. Most people don't understand what the rules really are."
Those rules, the guidelines for underwriters, have always been there. But during the boom years, lenders were easy with credit. As we all know now, as long as a client was breathing and could sign their name to a loan application, they were approved. Those bad loans are what started the economic crisis, and their legacy haunts many a mortgage lender.

As banks try to right the situation, they have gone back into the rulebook, and are requiring loans to go through a complete checklist. That includes often submitting full tax returns for two years, W-2 forms, and documentation of assets. And that's just for starters.

Stephen Slotnick, a mortgage broker with Prospect Mortgage in Maplewood, N.J., really did ask a couple for their marriage certificate as proof that the extra $15,000 that had recently appeared in their bank account had come from a legitimate source.

"Gifts are an acceptable form of income, but you have to be able to show who the donor was, and then show the transfer of money into your account," he says. "You have to show the whole trail of funds. It's tedious, but even for buyers with the most excellent credit, if they can't document funds, they will have a problem with getting approval."

And if an application is kicked back from the underwriter because assets were not fully documented, it could add another 30 to 60 days to the process. The key, say experts, is to prepare all your documentation upfront.

Slotnick says that he can spend up to a week going through a person's tax returns and assets, looking for things that might trip them up. If a client is self-employed, or if they have a second home, the documentation can pile up, extending the time it takes to complete the application.

But it's the work on the front end that will save time on the back end, he says.

"My obligation as a loan officer is to properly evaluate a borrower's income, using every means I can," says Slotnick. "Rather than be a bad guy 30 days from now, when something comes up, I'd rather ask the hard questions now."

Realtors would rather they ask the hard questions upfront, as well.

"In general, the process is a lot more time-consuming, and requires more documentation than was previously the case," says Jed Smith, managing director, quantitative research at the National Association of Realtors. "When loans are delayed, it's often because of inadequate documentation."

Smith says that a homebuyer's best strategy is to talk to people to get recommendations for mortgage brokers. Chances are, if someone had a successful experience, it was because they worked with someone who understands the process. That, says Smith, will help avoid delays. But don't expect the process to be as speedy as it was a few years ago.

"The feedback we are getting from our membership is that what used to take 30 days or less could take 60 to 90 days," he says. "The process is more protracted than it was, and people need to be prepared for that."

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