Agent: For Sammamish and Other Homebuyers, New Mortgage Requirements in Place To Avoid Default

There were many contributing factors to the meltdown of the mortgage industry in recent years. The Feds have taken steps to ensure that borrowers are protected from further deceptive lending practices. Although most of the new guidelines are a benefit to the industry, borrowers are finding that qualifying for a loan has become substantially more difficult.

Two years ago, there were 13,000 mortgage brokers in the state. Many were untrained, and some were arguably unethical, resulting in unfair business practices. Some of these brokers might have had questionable pasts since no background checks were required. Today, things have improved substantially. Because of new requirements in education, testing and oversight, only 3,000 brokers in the state qualify to practice legally. But, borrowers can now be confident that whomever they are working with will supply all the information that is needed to make an informed decision.

At one time, borrowers could secure a loan with limited funds and less than perfect credit. New restrictive guidelines are now in place that can prevent even the most qualified to be denied by some mortgage companies. Requirements are set by individual loan originators. These requirements are non negotiable.

Verified documentation is required for all sources of funds used in the transaction, including checking, savings, certificate of deposit and money market accounts. Earnest money, often referred to as a good faith deposit, must be verified by a copy of the check and two month’s bank statements, if the check has cleared or verification that there are sufficient funds in the account to cover the check and any additional required funds to close if it has not cleared.

Two to six months of reserves could be required depending on the type of property. Pinnacle Financial sets ratio qualifications at 35 percent/43 percent maximum regardless of any extenuating circumstances.

The downturn in the economy has hit everyone to some degree. Income has fallen. Original guidelines allowed income averaging over the last two years.  Now, you must qualify with the previous year’s deflated income. 

The first concern has always been the credit score. Banks are going beyond credit score to require at least three tradelines (credit cards) that have been active for a minimum of 12 months. Eliminating credit cards may improve your score but may ultimately disqualify you for a loan. At least two scores need to be submitted and the lower of the two is used. Banks check credit reports several times during the process. If any new inquiry is revealed a detailed letter of explanation must be presented. It is wise to refrain from any large purchases until the loan has closed.

There are new guidelines on using gift funds, employment, expense account payments, commissions, bonuses and overtime income. Many items that were not considered in debt to ratio, such as limited number of payments due on a car loan, are now part of the debt calculations. The best recommendation that anyone can get is to seek advice from a broker long before you intend to purchase a home.

OK. You have spoken with a mortgage broker, have great credit and sufficient funds to close. You have found the perfect house and like all of the remodeling that has been done. You may still not get the loan since it is based on the appraised value of the home. New underwriting guidelines can add time limits on acceptability of appraisals with re-appraisals required. Depending on market conditions, the appraisal could be lower and the sale could be put in jeopardy.

Appraisals always look at comparable property sales in the neighborhood.  Appraisers are now required to take into consideration the time lapse between the sale of the comparable property and the subject and account for depreciation of the market. Some brokers are now requiring that permits be obtained for any additions – even if those improvements were done by the homeowner without a permit. No permit, no loan.

Although new requirements make it harder to qualify for a loan, the real outcome is that borrowers and banks should be more confident that homeowners will not default on their loan and banks will not carry the burden of having to foreclose.

Joan Probala is the managing broker for Issaquah Windermere (Windermere Real Estate/East Inc.). She has 30 years of experience in real estate, construction and sales.