In 2007, the U.S. economy fell victim to a massive mortgage crisis that we're still dealing with today.
At the risk over simplifying the problem, the crisis stemmed from a variety of factors -- like the fact that home prices were skyrockets, the belief that those prices would never deflate, and lenders' unrelenting eagerness to participate in the seemingly endless flow of money and profits.
In its heyday, the housing market buoyed homeowners to cash out on their equity, and to take out extravagant second mortgages. Unfortunately, this easy access to money also encouraged buyers who could not afford to pay off their mortgages.
Eventually, those borrowers began to default -- in record numbers. In response, banks ceased lending to one another. Banks began to fail, the FDIC stepped in to high gear, and many of the greatest of bank institutions either failed or were bailed out by the government.
In response, banks and government regulations tightened up the money stream. The days of easy loans are gone.
So how exactly has the mortgage application process changed since the great crash of 2007? What can you expect if you're applying today?
1. Higher down payments
In the 2004 - 2005 peak, lenders pushed no-down-payment loans. The markets were booming and profit was a no-brainer, or so it seemed.
Boy, have things changed!
Right now, conventional loans require a down payment from 5% to 15% for those with qualifying credit scores. FHA government- insured loans now require a down payment of at least 3.5%. For those with credit scores below 580, the FHA percentage rises to 10%. Today, only VA loans available to military veterans, and USDA loans, for residents in specified rural areas, are available at a zero down payment.
2. An emphasis on credit scoring
Long gone are the days where unqualified buyers received hundreds of thousands of dollars. In today's world, mortgage qualification -- not to mention mortgage rates -- is almost completely dependent on your credit score.
Most conventional loans require a score of at least 680. Nonetheless, only those with scores of 720 or above are near certain to qualify, depending, of course, on their individual financial obligations. Likewise, those with the higher scores will most definitely enjoy the lowest interest rates.
3. Income and employment verification
It's almost impossible to imagine by today's standards, but in the boom years, lenders granted huge loans based on verification of, well, nothing! These days, borrowers are required to provide proof of income by way of bank statements, cash reserve statements, and two years of income tax returns.
Employment and job stability are now verified as well. Self-employed candidates have even tougher standards as they must show proof of a steady business as well as stream of income.
4. Debt-to-income ratio
As part of the mortgage approval process, most lenders will consider the percentage of your mortgage payment in proportion to your gross monthly income. Ordinarily, this figure should not exceed 33%. While a high credit score, or a significant cash reserve can affect this ratio, lenders are far less flexible in enforcing this than they were in the past.
5. Hassle and aggravation
Financial blogs and publications are replete with customer frustration. Employment verification commonly requires submission of work schedules. Landlord proof of rental history is another common aggravation. Some lenders are requiring three months of mortgage payments on hand before approval. For those in "layoff prone" industries, lenders are known to require proof of higher sums of cash on hand.
Bottom line -- be prepared! Today's mortgage approval process is completely different than it was a few years ago. You'll need to be ready for any and all questions that come your way!
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