As some of you know I have a financial background. I worked in the financial world while going to law school and then became an attorney and I worked with corporate retirement plans. Occasionally I guest blog for Dear Vixen on these subjects and for posterity I like to post here also. My prior financial post on getting ready for retirement is HERE.
The Rigors of Getting a Mortgage in this Economy
My husband and I had owned two units in a tenants-in-common building in San Francisco, where we had purchased the building with a group loan and then later converted to individual loans on each unit, so we were not newbies to the mortgage acquisition process, but it is much more difficult than it used to be.
The mortgage process is somewhat new, and not for the better. We have a credit rating of over 800 and savings appropriate to a couple retiring in their mid-60s, so we thought the process would not be difficult. Here are my suggestions for making it as painless as possible:
1. Do not overbuy. Buying a house that is a little less than you might like may not appeal to you, but it will make it easier to qualify for a loan. Lenders are much stricter about your proving you can service the loan than they were prior to the foreclosure crisis of the last few years. In order for us to do that we had to move to Oakland from San Francisco.
2. Most lenders now require a 20% down payment unless you qualify for a special program of some sort. We put down 25% to improve our interest rate. So have your cash in order before you start.
3. During the loan approval process do not buy a car, run up any credit cards, or make withdrawals from your savings, except to move the loan process forward.
4. Have your taxes done and filed. We purchased in February 2013, and our lender wanted us to provide a 2012 return, which we had not filed yet since it was not due, and then they contacted the IRS directly to verify that it matched the IRS return we had given to the lender.
5. Since our condo had been purchased by the seller in the last 12 months and was then being resold to us (flipped) our lender required two appraisals, that then stretched over the next six weeks. So that means you have to be patient.
6. They want every financial document; bank statements, brokerage statements, your W-2, etc. for the preceding 2 or 3 months, and if the loan approval process stretches over longer than a month, then they want you to provide fresh statements.
We had problems with self-employment and seasonal W-2 income. The lender wanted a statement from our accountant that we have a legitimate business. Since we do not have an accountant, they did not want to use the self-employment or seasonal income as part of our ability to pay the loan. This seemed a little odd since we were not only paying state and federal taxes on the self-employment income, but social security (F.I.C.A.) as well. We had had the same seasonal income for over 10 years and it was even W-2 wages so this was an unpleasant surprise.
7. Check your credit. Contact Experian, TransUnion or Equifax for one free credit report a year. You should have a credit score of 720 or higher. Check for errors or small bills that might not have gotten paid. Credit Card debt should not exceed 50% of your credit limit (although in general I recommend you pay your cards off every month). If your balance is above 50% you may be able to get your credit card company to increase your limit.
8. Apply for the loan before any transitions or retirement. We had just retired, and the lender did not want to rely on our W-2 wages since we no longer had jobs, and we had not yet taken any interest or dividend income since we had finished out 2012 living on our savings rather than taking money from our savings accounts, so we had a problem proving we had the investment income to service the loan.
If you are retiring and you have assets, but not much visible income, both Fannie Mae and Freddie Mac allow your lender to “annuitize” your assets by making a conservative estimate of what your savings/IRAs/assets would generate as income if spread over the life of your loan. In addition, if your are eligible for Social Security but have not chosen start receiving it, you can generate an estimate to show your lender what is available to you.
9. This is going out on a limb, and you know I could be wrong, but prices are rising, at least in the San Francisco Bay Area. If the tech boom continues, prices may continue to rise, so if you are thinking of buying a home this might be a good time, for some stats on prices rising click HERE. But then, this bubble may end soon, we will have to wait and see.
Why are things so much more difficult? The many foreclosures and short sales over the past few years have made everyone more cautious about lending money. Not only was there malfeasance on the part of the big banks, there was a lot of fraud on the part of borrowers. Many lenders sell your loan to the F.H.A. and they have to prove a much higher level the borrowers ability to pay back the loan since the financial crisis of 2007-2008. Good luck, we survived the process and are very glad we did. We now live in the Adams Point neighborhood in Oakland.