With their children out of the house, many empty nesters consider downsizing their expenses, starting with a smaller home. If they haven’t bought a home in a while, they will find that much has changed in the mortgage process, especially since the 2007 subprime mortgage crisis. Aligning your expectations with the reality of today’s mortgage process can take much of the frustration out of the experience.
Standards Have Tightened
Pre-2007, a minimum FICO credit score of 620 was accepted, but now lenders require a score of 680 or higher. If a buyer does not meet the minimum FICO score, they cannot be approved for a loan.
More Financial Documentation
In the past, lenders only required one year of W2’s, but now two years is the norm. A copy of your most recent tax return(s), which you can request on IRS form 4056, will also be a part of the requirements, along with employment verification in 10 days prior to closing, rather than 30. You will be asked to provide bank statements, mutual funds, IRA accounts, and savings accounts—basically, anything that is considered an asset.
With conventional loans, you will only be able to borrow 80 percent of the home’s value, not 100 percent as was allowed before the mortgage crisis, though other loan options may offer more flexibility, provided specific criteria are met. Your total debt will also be viewed more cautiously than in the past. Generally, your debt-to-income ratio will need to be less than 45 percent, with no more than 33 percent going toward housing costs.
Escrow Is Required
A down payment of less than 20 percent will likely require monthly payments into an escrow account. The lender will use the payments to ensure that the money for property taxes and insurance payments is available when due.
Approvals Take Longer
With the added restrictions, the approval process may take longer than you remember. Every detail is checked and rechecked to make sure the borrower is financially able to handle the debt, and the time from application to closing will be at least 30 days, possibly 60.
It’s easy to be anxious during the wait, but understanding the process and working with a lender you trust can significantly reduce the stress. To learn more, contact me today.