Now is a great time to become a homeowner or to consider selling your current home and purchasing a new one. Low mortgage rates, low home prices and tax credits have more people considering buying or selling, making this a good time to get into the market.
But before you buy a home, it’s important to consider some of the recent changes in the mortgage environment.
“The product offerings and many of the details within those have changed substantially,” says Tom Stoll, senior vice president and head of mortgage at Fifth Third Bank. “There are significant changes, especially when it comes to self-employed borrowers who have the credit quality, may have the equity and down payment, but still cannot meet some of the income criteria based on the allowed tax treatment for their earnings.”
Smart Business spoke with Stoll about how the mortgage environment has changed and how new tax credits and regulations have aided those changes.
How has the mortgage environment changed?
Not a whole lot has changed as far as acquiring a loan — you still need to supply the lender with a W2 or pay statement — but many product offerings have been removed from the market. Many of these options were ones that consumers may have been confused about or didn’t have to verify the same information required for traditional loans.
Now, predominately, you have the conventional market, Federal Housing Administration loans and some state-administered bond programs that you can look at when considering a mortgage. The conventional and FHA markets make up 90 to 95 percent of loans being taken out today, and the process is still the same as it was before.
Everything is also back to full documentation and verification. The government heard consumers complaining that lending was too easy and that the terms to qualify for a mortgage were not stringent enough.
Any mortgage product that is not full disclosure or verification has been removed from the market.
What impact has the first-time homebuyer tax credit and current homeowner tax credit played in the mortgage market?
This has been significant. First-time homebuyers, typically looking at a little lower average home price, have been the most active buyers and have been shortening the inventory supplies. The National Association of Realtors was reporting close to 12 months or more of inventory several months ago, but the most recent reports have put it at seven months in the Greater Cincinnati area, which is a more typical market. The sales are also more traditional and not mainly foreclosures and short sales, so it’s helped with determining appraised values. This may have offered price stabilization and confidence to move up buyers thinking of selling their existing homes and trading up.
This is the third version of this program, and it’s one of those scenarios where, if you can enjoy the low rates, get the incentive and it’s on sale, there’s nothing stopping you from purchasing.
How important is tax preparation in obtaining a mortgage?
When lenders ask borrowers to sign an IRS Form 4506, they’re granting the lender permission to receive a tax transcript of what was sent to the IRS. This is the same as lenders looking at a pay stub, W2 or a verification of employment. You can’t do that with self-employment, so the secondary verification can be the retrieval of tax information with permission from the borrower.
Receiving gift money for a down payment is another area that lenders will pay special attention to. Lenders want to know who that money came from and want a copy of that check and the deposit ticket.
Sometimes lenders want to make sure that the deposit came into your account without any debt. All they can see is the money in your account, but not if there’s any corresponding debt. The paper trail is also important so lenders know the source of the funds and that no other debt is attached.
What is the new Real Estate Settlement Procedures Act law that went into effect Jan. 1?
This holds the lender accountable to what he or she disclosed to the borrower at the beginning about how much it will cost to fund that mortgage transaction. Before, there was no responsibility on the lender’s part of what he or she shows the buyer or that he or she has a legal obligation for these numbers to be exactly the same at closing.
The new regulation provides more responsibility for lenders to refund any difference and that the numbers can only be changed under particular circumstances. The government heard way too many times that consumers received a very attractive number, but something else was shown at the closing table and it could not be changed.
The consumer can now make a claim against the lender because he or she did not accurately and fairly represent the true cost associated with that transaction.
The new settlement statement also includes more details and has boxes that say the consumer is specifically paying this to the bank in order to get the loan. This provides clarity, because there were many complaints about how confusing the settlement statement was.
Tom Stoll is senior vice president and head of mortgage at Fifth Third Bank. Reach him at (513) 358-5634 or [email protected].