Speaking at an annual Mortgage Bankers Association (MBA) conference in Washington D.C., mortgage bonds expert Lewis Ranieri characterized tightened mortgage credit requirements as "an irrational restriction" of credit as mortgage lenders and regulators attempt to avoid losses related to "exotic" mortgage loans and lax credit underwriting practices that contributed to the economic downturn.
Mr. Ranieri indicated that the pendulum has swung too far into restrictive lending territory and said during his remarks, "If this legacy persists, the consequences will be more profound for the country than the losses" caused by the housing bubble bursting in 2007.
Home Ownership Declines
Data from the U.S. Census Bureau supports Mr. Ranieri's comments to some extent. During the second quarter of 2013, the homeownership rate declined to 65 percent from its June 2004 rate of 69.3 percent. The decline in homeownership is attributed to home foreclosures and the tighter lending requirements adopted by mortgage lenders in the wake of the economic downturn. .
Mortgage lenders typically require complete documentation of borrowers' income and assets and 2014 will bring additional mortgage underwriting rules known as Qualified Mortgage (QM) rules, which require stricter underwriting and creates lender penalties for failure to comply. Mr. Ranieri said that "Fear and not fact are making credit tighter than it should be."
While this news can't guarantee a change in mortgage lending requirements, there are steps that borrowers can take to improve their chances of being approved for a mortgage loan.
How to Prepare Before Applying for a Home Loan
If you're planning to buy a home or refinance your mortgage, having all of your ducks (and documentation) in a row is important. These tips can help get you started and may prevent delays during the loan approval process.
- Research your credit reports and scores before contacting mortgage lenders; take steps to correct credit reporting errors and to improve your FICO credit scores if needed.
- Eliminate or at least pay down consumer debt. Avoid incurring additional debt before and during your mortgage application process.
- Assemble full copies of federal and state (if self-employed, on commission, or if you want lenders to consider investment income) tax returns for the most recent two years. You will also be required to sign an authorization for the lender to obtain a transcript of your tax returns directly from the IRS. Unfiled tax returns? File them ASAP.
- If you're a wage earner, you'll need your last two years' W-2s and your last couple of pay stubs. You'll also have to authorize the lender to verify your employment directly with your employer.
- If you have gaps between jobs, be prepared to explain each period of unemployment.
- List your assets including other real estate, investments, retirement plans, pensions and deposit accounts with account information and balances for each. As with employment, you will be asked to sign forms authorizing the lender to verify this information.
- Finally, obtain a copy of your credit report. Correct inaccuracies that can lower your credit score and prepare explanations for any derogatory information that shows up.
These suggestions serve as guidelines for applying for a mortgage loan. Most importantly, once you've chosen a mortgage lender, follow your loan officer's instructions and don't forget to ask questions or request assistance during the loan application and approval process.