News Column

Colorado Springs buyers should expect greater scrutiny when they apply for a mortgage

June 16, 2014

By Rich Laden, The Gazette (Colorado Springs, Colo.)

June 16--Despite tighter borrowing rules that followed the recession and additional regulations that took effect this year, homebuyers can still obtain mortgages.

But there are many more hurdles to clear -- for buyers and lenders.

"It's not a lot more difficult than it was before. It's just more complex," said Arleyne Glasser, a loan consultant with the Colorado Springs office of imortgage, an Arizona-based mortgage company.

To qualify for a loan, borrowers should prepare for a far more rigorous application process than ever before. They'll be required to provide greater detail about their incomes, debts, sources of funds and job status, among other information, say some lenders and real estate agents.

"A lot of people work from old information," said Rick Van Wieren, an agent with Re/Max Properties in the Springs. "'This is how it worked last time.' Unfortunately, those rules have changed enough where they need to get this lending thing figured out for today, not the last time when they bought a home."

Some examples:

- In the past, a borrower might have gotten by with providing a lender with a pay stub and W-2 as proof of income, said Cindy Leonard, a senior vice president for Peoples National Bank in Colorado Springs. Now, a borrower will be asked to authorize a lender to verify proof of income with the IRS, she said.

"We actually get a transcript from the IRS that confirms that your (tax) return that you presented to me matches exactly what the IRS received," Leonard said.

"It becomes a little bit more of a documentation issue. We validate the information a little more severely. We used to just be able to take that W-2 at face value and take your tax return at face value."

"You can still qualify," she added. "It's just you may have to provide more paperwork than you did the last time you did it. I'll need your bank statement. And I'll need the prior month's bank statement. And I'll need your tax return. And I'm going to get a copy from the IRS. We don't necessarily believe anything we have in front of us like we used to."

- Lenders must document sources of funds that a borrower might use in buying the home, Glasser said. A borrower who received a $500 gift from a family member that shows up as a deposit in a checking or savings account might have to provide a letter from the relative showing the source of the money, she said.

Even if the money isn't being used in the mortgage transaction, the lender still might have to determine the source of funds deposited into a checking or savings account if they represent a certain percentage of total deposits and income, Glasser said.

"Primarily, the most difficult part of getting a mortgage today is the documentation in many respects, because we just document people to death," Glasser said. "That's the result of so many loans foreclosing and defaulting. When people went in for quality control afterward, and analyzed the loans, they found certain things hadn't been thoroughly documented. So now, we're having to document a lot more."

- Previously, borrowers might have rented out their current home and used those payments as an income source to qualify for a mortgage and move up to another home. To do so, borrowers might have presented a lease to a lender showing they're due a monthly rental payment, and lenders accepted the lease as proof of income.

Now, borrowers must demonstrate from past tax returns that they've been a landlord with steady rental income or, if they're a new landlord, show rental income for a year, Leonard said.

"You see this pretty frequently with people," Leonard said. "They'll find the home of their dreams, or maybe they're moving, and they can't sell (their current home) and they say 'I'll just rent it and then I'll buy.' Suddenly they have the debt load of both of those properties, so they need to show that rental income. And they can't unless they have it for a period of time."

- Past homebuyers didn't necessarily have to worry about their debt-to-income ratios -- how much they owed each month on their mortgage, car loans, credit cards and the like and how that compared with their income. In January, however, new rules took effect -- "qualified mortgage" and "ability to repay" standards designed to protect consumers and reduce the chances they will fall into financial trouble on their mortgages.

To qualify for a mortgage, buyers who are purchasing a home as their primary residence can't have debt that exceeds 43 percent of their monthly income, unless the government guarantees the loan, she said. In the past, there were no hard-and-fast limits on debt-to-income ratio, she said.

At the same time, lenders also must examine borrowers' potential likelihood of payment based on their job status, looming retirement and the like. Will a borrower who's changing jobs have the same income in the future? Will a retiree's post-employment income be enough to make a monthly mortgage payment?

The rules apply even to the rich and famous.

Peoples had a Denver professional athlete as a client; he had refinanced a mortgage through Peoples and now was looking to buy a home, Leonard said. However, the athlete's contract had expired, although he was expected to sign a new, big-money deal.

Still, at the time the athlete was looking for a loan, Peoples would have needed proof of his new contract before it could provide him with a mortgage, she said.

"He didn't have a job," Leonard said. "Now, most people think, 'Well, he probably is going to have a job.' And the expectation was that he was going to have a job. But because he didn't have a contract at that time, he technically would not qualify for that loan.

"Even professional (athletes) who earn a high income, if they don't have a contract saying 'I'm going to get this income for the next three years,' I can't do the loan."

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Contact Rich Laden: 636-0228

Twitter @richladen

Facebook Rich Laden

MORTGAGE TIPS:

- Do your homework: Before beginning the search for a home, sit down with a knowledgeable and experienced mortgage professional or lending institution. Have your credit report pulled, analyze how much debt you have and determine what kind of mortgage you're qualified to get.

- Get your finances in order; they'll be scrutinized closely: Having a huge debt load -- car loans, student loans, credit cards and the like -- could be a stumbling block to obtaining a mortgage. Having money in savings will help you qualify. At the same time, if you have a decent monthly household income, yet little or no money in savings, you'll raise a red flag when it comes to your ability to pay off a loan.

- Look for financial help: Having a down payment is key to buying a home. El Paso County and the Colorado Housing and Finance Authority have down payment assistance programs for qualified buyers.

- Rates remain affordable: Long-term, fixed-rate mortgages have risen in the past year yet remain historically low. Thirty-year, fixed-rate mortgages averaged 4.14 percent nationally in late May.

MORE INFORMATION:

- Consumer Financial Protection Bureau: www.consumerfinance.gov

- Home Loan Learning Center, part of the Mortgage Bankers Association: www.homeloan learningcenter.com

- Colorado Division of Real Estate, part of the Colorado Department of Regulatory Agencies: www.dora.colorado.gov/dre

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(c)2014 The Gazette (Colorado Springs, Colo.)

Visit The Gazette (Colorado Springs, Colo.) at www.gazette.com

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