If you bought a house in the last couple of years, or are in the process of buying one now, you may have wondered why there is so much paperwork involved in the mortgage-loan application. Nowadays it seems that the bank needs to know everything about us and requires three separate sources to validate each and every entry on the application form. Many buyers are being told by friends and family that the process was a hundred times easier when they bought their homes ten to twenty years ago.
Well, there are two very good reasons why the loan process is much more onerous on today’s buyer than perhaps in any time in history.
The government has set new guidelines that now demand that the bank prove beyond any doubt that you are indeed capable of affording the mortgage. During the run-up in the housing market, many people ‘qualified’ for mortgages that they could never pay back. This led to millions of families losing their homes. The government wants to make sure this won’t happen again. And, banks don’t want to be in the real estate business.
Over the last seven years, banks were forced to take on the responsibility of liquidating millions of foreclosures and also negotiating another million-plus short sales. Just like the government, they don’t want more foreclosures. For that reason, they need to double (maybe even triple) check everything on the applications.
However, there is some good news to this situation. The housing crash that mandated that banks be extremely strict on paperwork requirements has allowed buyers to get mortgage interest rates that are below 5%.
The friends and family who bought homes ten or twenty years ago experienced a simpler mortgage application process, but they also paid a higher interest rate (the average 30-year fixed-rate mortgage was 8.12% in the 1990’s and 6.29% in the 2000’s). If you went to the bank and offered to pay 7% instead of <5%, they would probably bend over backwards to make the process easier.
Instead of concentrating on the additional paperwork required, we should all be thankful that we are able to buy a home at historically low rates.
[Source: Keeping Current Matters]