Q: I’m applying for a mortgage through my credit union and I’m a bit surprised at the amount of information they’re asking for to process my loan. Why do they need to know so much about me to grant me a home loan?
A: Exhaustive research into the financial, personal and credit history of home loan applicants is not unique to credit unions. Every home lender will request similar information to process the loan.
But knowing that the deep digging is intrinsic to home loans doesn’t make it easier to understand. You might have expected your lender to ask for basic financial documents, like your recent pay stubs. But, when they started asking if you were ever involved in a lawsuit, you may have started getting uneasy.
Why are lenders so nosy?
Actually, they’re not. They’re only trying to satisfy the criteria for a protected mortgage, or a Qualified Mortgage. And all this need for deeper level questioning is fairly recent, too.
In January 2014, the Consumer Financial Protection Bureau (CFPB) introduced the Qualified Mortgage (QM), a loan category that protects lenders from being forced to buy back the loan if the borrower defaults. To qualify, the lenders must follow the CFPB’s guidelines when determining a buyer’s eligibility for a mortgage.
Essentially, lenders are protecting themselves through this process. That’s why most lenders will try to make a home loan eligible for a QM whenever possible.
The law dictates that lenders must be able to prove they followed the CFPB’s ability-to-repay guidelines when verifying whether a borrower is able to repay the loan. The more proof the lender has for the buyer’s reliability and good financial standing, the more protection they have.
That’s where all that intrusive questioning and document-digging comes into play.
While the QM is designed to protect the lender, it will also protect you, the borrower. When a lender is super-careful to determine that you can easily carry a loan’s terms, you’re protected from being stuck with a mortgage you can’t really handle.
Qualified Mortgage rules
Aside from the heavy documentation and investigation into the borrower’s financial and personal history, QMs come with the following rules, as dictated by the CFPB:
- Mortgages cannot have loan terms that exceed 30 years.
- Mortgages cannot involve negative amortization, or a condition in which the amount owed increases because the borrower is only paying toward the loan’s principal and not its interest.
- Mortgages cannot include balloon payments, or larger payments only going toward the loan’s interest, that are paid toward the end of a loan’s term.
- Mortgages have specified limits on a the borrower’s debt-to-income ratio and the amount of upfront points and fees a lender can charge the buyer.
What will my lender ask for?
Every lender will need a full paper trail; if your lender is trying to make your mortgage eligible for a QM, the list will be even more exhaustive. Of course, in today’s digital age, hardly any of this paperwork will need to be actual hard copies.
Here’s a list of documents you will likely need to provide for your lender:
- Financial account statements from the last two months and tax returns from the last two years to determine your financial standing.
- A list of your assets to verify you have money you can fall back on in the event of an emergency
- Your landlord’s contact information (if you’re a renter) to learn about your reliability
- A gift letter from anyone who gave you money to help cover down payment and closing costs
- Your credit report for your full credit history
- Recent pay stubs to prove employment status
- Photo identification to prove you are who you say you are.
What kind of personal questions can I expect?
Lenders will need to look beyond the paper, especially if they’re trying to grant you a QM. While these questions might seem intrusive, each one of them can substantially affect your financial standing and is something the lender needs to know about.
Here are some questions you can expect:
- Have you been through a divorce? If yes, what were the terms?
- Have you ever been involved in a lawsuit—on either side of the bench?
- Have you ever sold a home through a short sale?
- How long have you been employed at your current job?
While shopping around for a mortgage, whether it’s a QM or otherwise, remember to ask us about our fantastic home loan options. We offer better rates and quicker closings than most banks, along with the personal service and attention you’ve come to love and expect at Horizon. Call, click or stop by Horizon today to get started!