On January 10, 2014 new rules mandated by the Consumer Financial Protection Bureau under the Dodd-Frank Act will increase the detail required for mortgage applications to the point where they could easily run 500 pages long.
Just eight years ago, the typical mortgage application was a fifth that size. Some mortgage applications for no documentation loans were notoriously scanty and consisted of little more than a credit report, an appraisal and property information.
The new mortgage regulations require that lenders ensure that borrowers are fiscally fit enough to be able to make mortgage payments in a timely manner while protecting consumers from predatory lenders. The sheer volume of paperwork in the new applications can be daunting, but don’t lose heart. Here’s a look at what you can expect in a 500 page mortgage application:
Debt-to-income ratio vital
A typical package consists of the credit package, disclosures, the appraisal package and a list of what items are needed before closing. Having good credit and a large enough down payment are still vital to getting a great mortgage interest rate, but as of January 10, your debt-to-income ratio will ultimately decide whether or not you will be approved for a mortgage or refinance.
Your housing costs must considered reasonable, relative to your income and other debts. Borrowers cannot exceed a debt-to-income ratio of 43 percent, which is your total monthly debt divided by your monthly gross income.
Be sure to gather two years of tax returns, two months of bank statements and the source of every bank deposit. The reason for tracking every deposit is that lenders look at those who turn to family or friends to borrow money to make the down payment. These loans won’t show up on a credit report and could push a borrower over the debt to income ration ceiling. Lenders are now required to double check everything to insure the guidelines are met.
Be prepared to verify your identity before the mortgage lender. This requirement dates to the Patriot Act to insure that borrowers are not laundering money for terrorists.
The Dodd-Frank Act required lenders to combine the Truth in Lending Act and Real Estate Settlement Procedures Act disclosures to improve mortgage payment compliance and help people better understand their loans. The disclosures must use clear language and page layouts. The interest rates, monthly payments, and the total closing costs have to be presented on the first page.
The most important information has to be highlighted. The new forms must provide more information about the costs of taxes and insurance and how the interest rate and payments may change in the future. Clear warnings have to be included about borrowers avoiding features that stipulate agreeing to penalties if a loan is made early.
On option adjustable rate mortgages, where minimum payments don’t pay down all the interest, disclosure must be clear that the principal balance will increase even if the payments are made on time. Closing costs like appraisals or pest inspection fees must be clearly laid out.
All of these changes are designed to achieve greater transparency in what is for most homeowners the biggest financial transaction of their lives.
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