-extreme. There were too many abuses by the mortgage industry and some customers. There were too few restrictions on loan programs and lending overall. Basically, things were too loose.
Fast forward to 2011. The mortgage industry is at a polar opposite from just a few short years ago. The industry has gone from loose to constrictive. In fact, constrictive may be too light a word to describe how regulations have changed, which completely altered the basic dynamics of getting a mortgage loan in today’s market.
Full documentation loans rule the day. What this means is that everything has to be documented fully. Pay stubs, tax information, bank account information on every account used in the transaction. Almost any extraordinary deposit has to be documented as to where the money came from. This can be asked on very modest deposits, not just large deposits.
If one submits tax returns for a loan, those returns have to be signed, whereas just a couple of years ago, stock transcripts from the IRS would satisfy the underwriters.
Gone are the days of low documentation loans. Long ago, if one had excellent credit and a large amount of equity in their property, a bank would not have to document all the income or assets used for the loan.
These days, no matter how much equity one has on the property being refinanced, everything must still to be documented. Income has to be checked, as does the asset information. If a homeowner is refinancing a loan for $500,000 against a value of $2 million there is equity of $1.5 million. Common sense would dictate that there is enough equity to allow for some relaxing of the documentation rules. But in today’s banking world, this loan too needs to be fully documented.
The chances of a homeowner walking away from a home that has a loan for 25% of its value is very small. In a worst-case scenario if something unexpected happened and the financial institution ended up with the home, the institution would have property worth a lot more than the mortgage.
For condominium mortgages the industry is now starting to ask for proof of walls in insurance to be in place. The logic is that in case of a fire, the industry wants to make sure that the condominium owner will restore the unit to its current condition.
Credit criteria remain strict. On FHA loans, the minimum criteria on a basic loan requires a FICO score of 620. On conventional loans the requirements are higher. Credit scores on conventional loans will effect the overall pricing of the loan.
No one expects the rules in the industry to relax anytime in the near future.
Bill Starrels is a mortgage loan officer who lives in Georgetown. He specializes in purchase and refinance mortgage loans. He can be reached at 703 625 7355 or email email@example.com