Do Lenders Go Too Far in Collecting Personal Data on Home Buyers?

underwear I once had a client ask me, “What does the underwriter want to do next, look in my underwear drawer?”

Interesting question! Especially since more data is collected nowadays than ever before. Here is a list of personal information that lenders collect and the reasons why.

   8 Things Your Lender Will Ask When You Apply for a Mortgage

1) Age. A person must be at least 18 years old to qualify for a mortgage. It is illegal to discriminate based on age. Thus, a 95-year old can get a 30-year loan. It is illegal to charge young borrowers or old borrowers more based solely on age.

2) Race/Ethnic origin. It is illegal to discriminate or charge certain races/ethnic groups more than others. In Mortgage Rip-Offs and Money Savers (p. 211), I tell how some lenders get around that regulation and why minorities often pay more–as well as how you can prevent that from happening to you.

On the loan application, there are boxes to check for your race/ethnicity. One of the boxes says you prefer not to give that information. However, if you check the non-reveal box, the loan officer is required by law to take a guess and check one of the boxes. For people who are of mixed race, loan officers often get it wrong. Or if the loan officer isn’t good at telling whether you are Italian, Hispanic, or a Pacific Islander, you could easily have incorrect personal information in your file. Maybe you don’t care; it is up to you to decide whether to let the loan officer take a guess or to state the information yourself.

3) Marital status. This information is required, because in community property states it is illegal for a married person to sign for a mortgage loan without the spouse knowing about it. The non-borrowing spouse must sign documents of acknowledgement and consent, even if he or she is not on the loan contract or title.

4) Sex. On the loan application, there is a box for male or female. The purpose is for government agencies to verify that lenders are not charging women more than men. Lenders do not ask or care whether you are straight, gay, or other. So when you see an ad that says, “All people accepted here,” that is not special to that institution. The law says all people are accepted at all lending institutions.

One of my coaching clients said his Realtor told him and his partner to go to a certain mortgage bank “because they accept gays.” The Good Faith Estimate he received was an over-priced loan. I told him that all lenders accept gays; and in fact, they don’t ask and they don’t care. Knowing this enabled him to go get a better priced mortgage.

5) Number of dependents. This refers to number of dependents under age 18. If you’re supporting an elderly relative or a 22-year old college student, you need not include that person as a dependent, because it is considered voluntary. On the other hand, children must be cared for, and the number of dependents you support is a factor is determining the allowed debt-to-income ratio. A family of ten needs more money for groceries than a family of three, so more disposable income is required.

6) Income Verification. You must show you have enough income to handle all your current obligations plus a new mortgage with taxes, insurance, and the monthly mortgage insurance fee, if applicable. The current guidelines say your debt-to-income ratio should be no more than 43%; however, there are exceptions.

7) Two-year employment history. Income stability is an issue. For self-employed people, your business license must be at least two years old. If you’re thinking of quitting your salary job and making a go of your own business, buy a home first or wait two years. It is acceptable to change jobs within that two-year period, so don’t pass up an opportunity for advancement. The “No Employment Required” loans of the sub-prime era are gone.

8) Asset Verification. Lenders require two to three months’ statements showing assets. You must verify where your down payment money is coming from. If it is gift money, that must be verified. No secret side loans for your down payment! No taking a cash advance on a credit card for your down payment! And, you’ll need to have some cash reserves left in your account after your loan closes, so you can’t use every last dollar you have.

In addition, a lender may ask for anything and everything else they believe they need. 

Sometimes borrowers ask, “Do they really need that?” And, “Why do they need that?” Or, “Can they ask for that?”

Those are valid questions, and you have the right to know. Feel free to ask your loan officer why. A good, experienced loan officer should be able to answer your questions. If they don’t know the answer, they should offer to ask the underwriter and then let you know. Underwriters don’t speak with borrowers directly; that is your loan officer’s job.

If you have more questions or comments on this topic, feel free to ask. I promise to answer. You’ll see the comment button at the top right of this column.

Feds Plan Tougher Requirements for Home Ownership

OLYMPUS DIGITAL CAMERAJust when some lenders and real estate agents are saying underwriting is getting better, six Federal agencies are working to get tougher, stricter requirements for becoming a home owner passed into law. Here are three things they want:

1) Bigger down payment. They want you to make 30% down payment to get the best interest rate and best terms. Ouch! How many first-time home buyers have that kind of cash? This would force tens of thousands of borrowers to take a higher rate, even if they have great credit.

2) Stricter credit requirements. Even with the sub-prime loans far in the rear view mirror, they want even higher standards for credit. This will decrease home sales and home ownership, which is counter-productive to growing our economy.

3) Ban combo loans. They want to ban getting a second mortgage in combination with a first mortgage to avoid paying the monthly private mortgage insurance (PMI). So the strategy of putting 10% down, taking an 80% first mortgage with a 10% second mortgage to save money would become illegal. I have to ask, why are they trying to force everyone who doesn’t have 20% down into paying PMI?

The six agencies asking for this are the following:

1) The Federal Reserve

2) The Federal Deposit Insurance Corp.

3) The Federal Housing Finance Agency

4) The Dept. of Housing and Urban Development

5) The Office of the Comptroller of the Currency

6) The Securities and Exchange Commission

Who Does NOT Want Stricter Home Ownership Requirements:

1) The National Association of Realtors

2) The Mortgage Brokers Association

3) Builders

4) Mortgage Bankers Association

5) Private U.S. citizens

David H. Stevens, CEO of the Mortgage Bankers Association and a member of the coalition opposing the plan says, “We plan to be very clear and very vocal” in fighting this. I say, “You go, Mr. Stevens, and go strong!”

If you don’t want to see this 505-page proposal become law, please make your voice heard by contacting your state representation and saying you are against “QRM-Plus.” And please make others aware of this via Twitter, Facebook, email, and other means, because home ownership affects us all.

Stupid and Illegal Requirements from Mortgage Underwriters

frustrationWhat is the worst request you’ve ever seen from a mortgage underwriter? What paperwork was asked for that was totally over-the-top ridiculous? More and more, home buyers and homeowners refinancing are being asked to provide documentation that makes no sense whatsoever. Some of the information they’re asking for has already been provided in two different forms already, so digging up yet a third verification seems downright stupid.

And then there are the underwriting requirements that are actually illegal.

That’s right. Some underwriters today are asking borrowers to give them paperwork they have no business asking for! It’s high time this come out in the open and that underwriting supervisors and mortgage managers put a stop to this madness. Can we have some common sense in the underwriting department, please?!

For example, yesterday I was talking with a self-employed chiropractor. When his purchase loan was in progress, the underwriter from the wholesale bank that his broker was going through asked him to submit all of the checks he had deposited into his business account in the last year. He had already provided three years’ income tax returns (which they verified with the IRS) and his bank statements. And now the underwriter wanted to see all the personal checks that each and every one of his patients had paid him as well? He told her, “No way, that is doctor-patient privileged information, and it would be illegal for me to give that out.”

Another home buyer (at a bank) was trying to get pre-approved. His application showed a gap in employment during a time when he was hospitalized. However, during that time he maintained his perfect credit; and now he was fully recovered and back to work. The underwriter asked him to provide a letter from his doctor stating he would not get ill again. Can you imagine any doctor guaranteeing someone would not get ill in the future? Talk about underwriting stupidity!

I am making a public call for common sense to come back into the underwriting department.

In the meantime, what is the worst underwriting requirement you’ve ever seen? Please either post a comment (you’ll see the comment tab at the top of this post) or send me an email by clicking on the Ask a Question page (see big blue tab at top).

Should Your Realtor Choose Your Lender?

OLYMPUS DIGITAL CAMERAI’d love to hear feedback from both real estate agents and home buyers on this newly released statistic.

According to a study by Campbell Surveys and Inside Mortgage Finance, real estate agents controlled or influenced 45% of homebuyers’ choice of lender.* Is this a good or bad thing? Let’s look at both sides, and then you can draw your own conclusion.

In Favor of Using Your Realtor’s Preferred Lender

A Realtor’s #1 concern is that the transaction gets closed–and on time. There’s nothing worse than having the lender mess up the process so a lose/lose/lose situation is created. If a bank has inept, inefficient, or crazy processing and underwriting so that your loan doesn’t close on time, it can create havoc with your moving schedule and purchase contract. The seller might not agree to extend your contract if there is a higher back-up offer. You could lose out on the house of your dreams; or if the seller agrees to an extension, your moving schedule gets messed up. The real estate agent doesn’t get paid on time, or perhaps not at all if the deal is lost.

Who then could blame a Realtor for recommending a lender he or she knows is efficient and has a history of closing on time?

Against Using Your Realtor’s Preferred Lender

Do you care if you pay hundreds–or perhaps a couple thousand–dollars more for your loan? Do you care if you get the lowest interest rate and lowest monthly payment? Do you care if you pay a boatload of junk fees, thereby perpetuating the problem of lenders taking advantage of unsuspecting and uneducated borrowers?

Just because the subprime era is over, it doesn’t mean there aren’t plenty of rip-offs and over-charges going on, because there are!

Yesterday, I heard from a homebuyer who said he got his mortgage broker to delete $1,558 in stupid junk fees, because he was aware and knew better, thanks to reading Mortgage Rip-Offs and Money Savers. Now he has that much more cash in his wallet he can spend on something new for his house.

Ultimately, It Is On YOU

No one cares about your loan more than YOU. It is  your right and your responsibility to know what is fair, what is an over-charge, and what is easily negotiated. It is up to you who you choose to give your business to, so you need to make an informed and responsible decision.

Maybe your real estate agent’s preferred lender is a great choice. On the other hand, maybe it is an expensive choice. Get a load of this…

In a large training session for multiple lenders, the so-called mortgage guru told the packed-out audience:  “Try to get referrals, because you can charge them more. When a friend or agent refers a borrower to you, they don’t shop and they don’t look at price.”

Having worked in both retail and wholesale lending, having been behind closed doors in sales, underwriting, doc draw, rate lock, and all the rest, I can tell you there are both Mortgage Stars and Loan Sharks out there. It’s a situation of Homebuyers Beware. Choose with your eyes wide open.

As always, I welcome your opinion–whether or not you agree with me. And thank you for stopping by.

* Source: Housing Wire

Home Buyers: Don’t Move Your Money!

account closed If you plan to apply for a home loan within the next three months, do not move your money around. Here are three tips:

• Don’t consolidate bank accounts.

• Don’t close a bank account.

• Don’t open a new account at a new bank.

If you want an easier, smoother loan closing, just leave your money as it is. Here’s why.

Right now, underwriting guidelines are super strict. Underwriters are expected to triple-verify everything. They want ironclad proof that down payment money and reserves (money in savings) are your own, not borrowed. In the past, borrowers who did not have enough cash to qualify for the home they wanted, used trickery to get qualified. They borrowed money from friends, took out cash advances on credit cards, or magically made cash appear from God-knows-where. There are tales of cash coming from drug sales, lap dances, and dumpster diving. I even heard a story from a loan officer friend about cash for the down payment coming from a giant garbage bag hidden in the kitchen. (He was visiting the home to take a loan application when the client showed him a hundred grand in bills in a big, black bag that was under the sink.)

Underwriters do not like what’s called “mattress money.” Why? Because money you pulled out from under your mattress might have actually been a secret side loan that has now pushed your debt-to-income ratio too high.

All down payment money must have a clear, proven, verified paper trail showing the money is and has been your own. Therefore, you are required to submit two months’ bank statements verifying the funds. If the bank statement shows a large deposit coming from a different bank account, that is a problem. Now you have to provide two months’ bank statements for that account. If you have shut down or opened new accounts, this gets complicated.

The last thing you want is complicated! Complications add more paperwork, more letters of explanation, more underwriting supervisors getting involved, more time to get your final approval, more time to close, and more headaches for you.

I’ve had clients who thought they were simplifying things by consolidating their accounts right before applying for a mortgage, but they ended up doing just the opposite. I’ve also had clients move large sums from investments to checking accounts in order to “get ready” to buy a house. Don’t do that. Leave your funds where they are and then ask your loan officer how to best transfer your down payment to the closing agent.

You might have a bank account in another state that requires three-days’ notice to move the money. This is okay. You will move the money and paper trail it, according to your loan officer’s instructions, at the appropriate time — not right before getting your pre-approval.

The exception to the above is if you will not be buying a house for at least four months. In that case, you have time to move your money, because you don’t have to show bank statements from that far back.

If you have any questions about this, please let me know. My goal is to help you have a pleasant, stress-free loan experience. When you are well-qualified and do everything according to the (underwriting) book, then it is possible to have a good finance experience–even now.

What took you so long, Mr. Bernanke?

Today, Ben Bernanke, U.S. Federal Reserve Chairman, said mortgage lending standards appear to be “overly tight.” Well, finally! I don’t mean any disrespect, but what took you so long to come to that conclusion? Mortgage professionals have been saying this for a couple years now.

Our economy will not fully recover until the housing market improves. And with the current extreme underwriting guidelines, that is not happening fast enough.

We went from “if you have a pulse, you’re approved,” to “if you have perfect credit, high income and low debt, you may or may not be approved.” Underwriters are running on FEAR. They’re scared to death of approving a loan that might go into default. Consequently, the approval process at the big banks and with many other lenders has gone over the line of common sense.

I’m calling for REASON and COMMON SENSE to come back to underwriting. For example, if an otherwise perfect borrower had one weird credit snafu, give the person some grace and let them buy a house. What’s the point of denying someone with a good income and good down payment just because of one “oops” on their credit report?

Here’s another true scenario for you to start using common sense on: A self-employed married couple, both attorneys, have $1 million in liquid reserves. They want to refinance their $500K mortgage to get a lower rate and lower payment. Look at the picture: they could choose to pay off the mortgage, if they desired; but their tax adviser has told them to refinance and keep their cash in investments. What did the lender say? DENIED! That’s right, their request to refinance was denied by several banks and lenders. Why? Because their tax returns showed they made less money this year than in their previous year.

Declined income = no loan. (Even if the debt-to-income ratio was still reasonable.)

I could give you more real life scenarios like this, but I think you get my point. Let’s bring common sense back into underwriting, loosen the ridiculously over-tight rules, and get our economy moving up again.

To comment, see the top of this post. As always, thank you for stopping by.

Do Lenders Really Need All This Documentation?

I received an email asking a question that a lot of folks are wondering about: “Do I really have to give my lender all this personal documentation?”

Included in the message was the list her loan officer had provided:

* W-2s from the last two years

* Current pay stubs to cover one month pay

* 1040 tax returns, all schedules, all pages, for the last two years

* Two months’ statements, all pages, for all accounts: checking, savings, investment, retirement

* Photo ID

Not only is it a lot of work to photocopy or scan all these pages, but it can seem a little invasive. People wonder why they need to look into every nook and cranny of their financial lives, especially when they have excellent credit and are putting down 20% or more.

Prior to the mortgage meltdown, the only documentation lenders asked for was the W-2 and a pay stub, and confirmation of the down payment. Tax returns were never asked for if you could show your income with a W2 statement. So now, the long list seems over-the-top.

Unfortunately, the answer is that both Fannie Mae and Freddie Mac are requiring triple the documentation that they did before. It’s not your loan officer that is being difficult, it is the new underwriting guidelines. And, it doesn’t stop there!

Just wait until the underwriter reads your credit report. It’s likely you’ll be asked for a Letter of Explanation about all those previous addresses. They want to a signed confirmation that you don’t own other properties they’re not aware of. And if your credit report shows you have a little mom-and-pop side business — such as an online business selling tee-shirts — you’ll have to document and write letters about that, too.

Then when the underwriter reads your bank statements, you might be asked for more letters. They’ll want to know why you have a deposit in the amount of $200 going into your checking account. Where did that $200 come from? Clearly it wasn’t a deposit from your paycheck, which would have been much larger. They want to know if it was a birthday check from grandma or cash from selling marijuana. I know, it’s ludicrous, right?

Welcome to the new rules of underwriting. Everything must be documented, preferably at least three different ways. And since the lender is the one holding the money you wish to borrow, they make the rules.

I spoke to a gentleman who said all the paperwork was “stupid” and that he knew they really didn’t need it. This was based on the last time he got a mortgage, over ten years ago. He decided to take control of the situation, so he told his loan officer, “You don’t need all that and I’m not doing it.” He knew he’d win. After all, he had perfect credit and a good down payment. He knew he was the ideal customer and that there was no way his bank was going to let him go.

Was he in for a surprise! They were more than happy to let him go. Without ALL of the documentation asked for, he was not going to get approved, final answer.

What do you think about all the paperwork and letters that are required to go into a loan file now? Have they gone too far? Or is this what they should have been doing all along? (To comment, see the top of this article.)