Friday, December 5, 2008
Mortgage Q&A: More paperwork required
Q. My wife and I are under contract to buy a neighbor's house. Our settlement date is Feb. 28, although we'd be happy to settle sooner. Our plan is to sell our house first, but we have a loan approval that's not contingent upon the sale of our home. Our down payment is coming from cash, a gift and a loan from a 401(k) account.
We have locked into a great rate, and I'm very happy with it. However, the mortgage broker is requiring a lot of paperwork. There was not nearly this amount of paperwork involved when we bought our existing home or our subsequent two refinances. We are putting down 30 percent and have credit scores in excess of 800. The hoops we are going through seem excessive. Any thoughts?
A. Welcome to the era after the subprime-mortgage meltdown. Beginning in about the mid-1990s, Fannie Mae and Freddie Mac, the two megagiant mortgage companies that purchase loans from banks, began easing their underwriting guidelines. If a borrower had good credit and a good down payment, very little paperwork was required.
Easing of the underwriting guidelines was a function of two things: continuing real estate appreciation and the federal government's continuing push to increase homeownership in America.
After many years of success, booming real estate values began to drop and ended a historical run in prices. Then, subprime loans, which were offered at higher rates to folks with a low down payment and questionable credit, became the rage. We all know what happened next - a mortgage meltdown and subsequent credit crunch of historical proportions.
You should not be surprised, despite your down payment and credit score, that your broker is requiring more documentation. You will need to provide bank statements to show that you have cash in the bank.
Your lender will want to see two months' statements to prove that your average balance is in line with the actual balance. You will need to supply executed gift letters from your donors, stating that there is no expectation of repayment.
Borrowed funds that are collateralized are acceptable. Your lender will want the note that evidences the terms of the loan against your 401(k) account.
Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.