Most, if not all, people who want to buy home are finding the mortgage approval process very frustrating. This is due primarily to the amount of documentation required by lenders as well as the amount of time before a final approval is given.
Unfortunately, much of this hassle started as a result of the financial crisis in 2008. Before the crisis, a potential borrower had a big choice of mortgage options, besides the usual fixed rate, 15- to 30-year, variable rate mortgages. There were others, however, including “interest only” variable rate and “no doc” products. Even credit scores in the 600s were okay and applications were processed and approved, usually within 15 to 30 days. Before applying for a loan, get more information.
That Was Then, this is Now
Since the financial collapse in 2008, the approval process for homes loans became much more complicated and now involves much more paperwork and time for approval from a lender. There are several reasons for this change.
- Buy-backs forced by Fannie Mae and Freddie Mac on banks require huge amounts of time and money to re-examine mortgage documentation for any erroneous or missing data on applications, especially for mortgages that were bought by them and not paid on time. This has caused a considerable increase in scrutiny of each application. In one large bank, for example, the new list of items that must be checked number 65. This means that the amount of time needed for review of each application increased from 30 days to 45 days.
- Most lenders require additional documentation—called “overlays”—for loans. This is required primarily to ensure that the lender is completely aware of the borrower’s financial position before the loan is approved. This is another element that lengthens the loan approval process.
- New homebuyers weren’t the only ones impacted by the financial meltdown. The accompanying financial meltdown caused millions to lose their jobs. There was also a significant decrease in the number of loans being applied for. Seeing no end in sight, many brokers simply closed their doors. Banks shifted their focus from mortgages to short sales, foreclosures and other non-performing loans. Now that the economy has improved, lenders are now scrambling for business. Unfortunately, bouncing back means training new people, which means more time taken.
- Ratings are given to loan originators based on the quality of the packages they submit to underwriters. Submit too many incomplete packages and you could be demoted or out of a job. Making sure a loan application is complete prior to submission is a good way to look good for a loan officer.
- The financial meltdown caused one more problem: lenders can no longer work with appraisers. It used to be that lenders could beg, plead, and otherwise cajole appraisers to expedite their work. Now, appraisers work at their own pace, which causes loan approvals to slow down significantly.
It’s Not All Bad News
President Trump did provide one avenue of relief, eliminating some of the rules that restricted banks. Unfortunately, with a new President, time will tell whether these new rule changes will remain or be reinstated.