Will home loans be slowed down under new government rules? Don't the new regulations gum-up the application process and delay real estate sales?
Mortgage Approvals Happen Faster
For most borrowers the answer is no. In fact, loan processing has become faster during the past year. Let me explain:
The new "qualified mortgage" rules created under Wall Street Reform plainly require fully-documented loan applications. Since most new home loans will be qualified mortgages it means that low-doc and no-doc loan applications are out for most borrowers. So-called NINJA loan applications -- No Income, No Job, No Asset applications -- will be as common as unicorn teeth.
With more home loan borrowers required to make fully-documented mortgage applications it follows that lenders will have to review more documents, papers and accounts to process loans. More paperwork should logically mean more processing time, so how is it possible that the lending process will not crawl to a halt?
Home Loans & New Standards
While it may not seem logical at first the reality is that loan processing times have actually declined. A study by Ellie Mae, a major provider of loan application software and systems, found that it took an average of 43 days to close home loans in December 2013 -- that's down from 55 days a year earlier.
There are several reasons why the faster times are now a surprise:
First, lenders have known about the new standards for some time. That means they have had months if not years to prepare underwriting standards, adjust software and educate loan officers. For most lenders, the new rules are simply not a big deal. There is every incentive for lenders to speed the application process, because a delayed closing means postponed profits and greater costs.
Second, with Wall Street Reform being in the news on a daily basis, the public has come to understand what's required to get a mortgage. Yes, you'll need tax returns. Yes, lenders want to verify income and debts. In many cases borrowers are simply better prepared to apply for home loans. As an example, it's now routine to check credit reports before making a formal loan application. This means factual errors and out-of-date items can be removed before a credit report is entered into the application process, thus speeding up loan approvals.
Home Loans and Paperwork
Third, the argument is made that more paperwork will mean more processing time for home loans. This argument assumes there is more paperwork in the first place but that's actually not the case for most borrowers.
For instance, FHA and VA loan standards are untouched by the new rules. Conventional loans sold to Fannie Mae and Freddie Mac are automatically regarded as "qualified mortgages" under the new requirements. The paperwork standards for conventional loans are essentially unchanged.
The reality is that many experienced borrowers never opted for no doc or low doc home loans in the past and they certainly avoided NINJA loan applications. Experienced borrowers routinely used fully-documented loan applications because such applications meant lower loan costs. For these borrowers -- and there are a lot of them -- the "new" loan requirements are virtually the same as the old standards. For such borrowers there is no additional paperwork.
In the end, tales about delayed home loan mortgage applications due to massive paperwork burdens are largely urban myths, fables and fantasies about as real as crocodiles in the sewers and fake moon landings. The next time you hear that the typical loan application weighs 42 pounds and takes 11 months to process be sure to give such stories the attention they deserve....