Borrower Fatigue: Why it Takes so Long to Close a Mortgage
Editor’s note: The following was written by Fernando Paez, an experienced mortgage professional and writer who lives and works in California and is a regular contributor to Bills.com.
A problem for the entire lending industry in early 2011 is a phenomena I call “Borrower Fatigue.” If you applied for a mortgage loan any time during the past two and a half years, you probably know what I am referring to. Loans that at first glance and initial review look like slam dunks can take months to close, if they ever close at all.
Appraisals and Reviews
There are a number of reasons why loans are taking so long to close. Ultra-strict Fannie Mae and lender underwriting guidelines are one of the key reasons. For example, borrower debt to income ratio guidelines have not changed much, but now it is harder than ever to qualify if you are self-employed. In the past, a self-employed borrower would only have to show a profit and loss statement signed by a CPA.
Today, all income is calculated based on line 37 of the first page of the 1040, “Adjusted Gross Income (AGI).” AGI is usually very low, since most self-employed people try to use as many legal deductions as they can to reduce their tax liability, which results in showing a lower income. The lower income no longer meets the underwriter's guidelines for approval. The fact that these guidelines change daily can be very confusing and cause big delays.
The dramatic drop in home values is another big reason that appraisals are scrutinized. Many times, even if the appraisal comes in at a satisfactory value, underwriters and credit committees will demand an appraisal review. These reviews can take a week or two to get done. Even after they are completed, the appraisal review report must go to the underwriter for approval, a process which typically takes at least a week or two. Appraisals and reviews are costly and these fees cannot be financed, but rather have to be paid upfront by the borrower directly to the appraiser.
Sometimes, the underwriting process takes so long that the appraisal expires. Appraisals are good for only 90 days, after which they have to done all over again from scratch. The added costs and repeated requests contribute heavily to borrower fatigue.
Documents and More Documents
The number one factor in borrower fatigue is the sheer amount of documents that borrowers have to produce in order to get a loan done these days. Gone are the days of “No Doc”, “EZ Doc”, or even “Limited Doc” loans. Now it is “Full Doc” or nothing and they are not kidding when they say “Full”: two years’ tax returns, two paystubs, all pages of all bank statements, property tax bills, insurance bills, scans of the borrower’s drivers license, divorce papers, bankruptcy discharge documents, adoption papers, lease agreements, and other types of very private papers may be required. Document requests often come piecemeal, fatiguing the borrower who feels that he or she has already given everything the lender asked for, only to be asked for more.
Even after a loan has been approved, underwriters can add a laundry list of conditions that can include things like updated tax returns, updated asset statements, and a variety of other documents. Sometimes, the documents have to do with the title of the property. I had a borrower recently who had to go to the county recorder’s office and find old county documents that showed that the additions to his old home were permitted properly.
Even borrowers with a great credit score can be put through the wringer, when it comes to information on their credit report. Any old collections or unpaid judgments or liens must be paid, even if the borrower has a great credit score. I have spent hundreds of hours on the phone doing conference calls with my borrowers and collectors or credit card companies, trying to get items paid and deleted.
Credit card issuers and collection agencies do not care at all about the consumer. As far as banks and collectors are concerned, the consumer is just one more in a long line of deadbeat debtors. But do not even think of calling a collection agent yourself. One misstep and you could end up paying the debt and never receiving a letter from the collection agency saying the debt is paid. You need to know how to negotiate and get what you need first (an official letter), before paying even one penny to a debt collector. That is why I insist on making the call with my borrower. After hundreds of these types of calls over the years, I am tough as nails and will not back down.
Another new Fannie Mae rule is that a borrower can't adjust his or her debt-to-income ratio for qualifying purposes by paying off credit card debt using 'cash out' from the equity in the home. This is a huge barrier, because one of the top reasons that homeowners take cash out of their equity is to pay off high-interest credit card debt and other consumer loans, which can save the borrower lots of money and improve the borrower’s financial health. What Fannie Mae is in effect saying is that, no, you are not mature enough to handle your own money; you need us to tell you how to manage your cash.
Premature Rate Locks
One of the biggest mistakes that newbie loan officers make is to lock in a loan rate too soon. Since most locks are for 30 days, this means that the entire loan process has to be completed in that time. The entire loan process consists of submitting the loan application to the lender’s underwriting department, waiting for up to five days for a response (this can be either an approval, a conditional approval, or a decline), getting the appraisal done (this alone can take one to two weeks), turning in more documents to meet all of the underwriter’s required conditions, getting a final approval and a few days later a HUD-1 Closing Statement, and a day or two later the actual signing of documents. There is a possibility that this process can take 30 days or less, but more than likely, the underwriter will continue to ask for many more documents, which will further delay the approval process. An experienced loan officer will know when is the best time to lock your rate, so you get the lowest rate and are less likely to have to pay a fee to extend the rate lock.
Once the documents are supplied to meet the underwriter’s conditions, the approval process starts all over again. The file has to be physically re-opened by the underwriter and, since there were conditions, it has gone back to the bottom of the stack, awaiting the new documents from the borrower and loan officer that will hopefully satisfy the underwriter’s requirements. If the documents fail to satisfy the conditions or come back incomplete or even hard to read, then the underwriter will kick the file back to the loan officer, and the process starts all over again.
How to Avoid Borrower Fatigue
The best way to make sure that the loan process is as painless as possible is to work with a licensed, experienced loan officer who cares about completing the loan. He or she will set realistic expectations for you and help guide you through the cumbersome and fatiguing process. This is one of the largest transactions that you will ever have in your life. Do you really want to leave it in the hands of an inexperienced bank employee making $15 per hour? Things can go wrong in a big way, quickly, so you should find a loan officer who can guide you through all of the pitfalls and challenges and help you close your loan with as little stress to you as possible.
Paez has more than 12 years of experience helping homeowners and home buyers with real estate financing. Paez also has experience doing commercial loans and loans for developers. He writes extensively on real estate financing and other subjects for several blogs and Web sites.