Red tape ahead? Bank on that

November 20, 2013

Katie Bushwick, 28, closed on a townhome in Frederick, Md., after facing fierce scrutiny by her mortgage lender. (Jason Hornick/For Express)

Katie Bushwick worked hard to buy a home, but maybe not in the way you would expect. Sure, she put in tons of nights managing a restaurant and bartending to save up money. And before that she served in the Air Force, which made her eligible for what she thought would be an easy-to-get Veterans Affairs loan.

But the hard work really kicked in after she found a townhome in Frederick, Md., for herself and her 4-year-old daughter, Ellie. That’s when Bushwick had to prove to the bank that she could be trusted to pay back a home loan.

For two months Bushwick had to produce “statement upon statement of child support transfers,” divorce papers, court proceedings and even her ex-husband’s bank statements. “Honestly, if I had known how difficult and strenuous this process was going to be,” Bushwick, 28, says, “I probably would have reconsidered buying right now.”

Mortgage applicants are having to dot the tiniest of Is and cross an astronomical number of Ts to get approved for a loan. After all that work, many don’t pass the test — about 42,000 applicants in the D.C.-metro area were denied loans in 2012, according to the Federal Financial Institutions Examination Council. That’s about 13 percent of applicants, including new loans and refinancing, overall. But it’s not the government that’s forcing them to try again or stick with renting — it’s the banks themselves.

During the housing boom, around 2005 or 2006, “if you could fog up a piece of glass, somebody was going to give you money to buy a house,” says Mike Aubrey, a D.C.-area Realtor with Re/Max and the host of HGTV’s “Power Broker.” Burned by foreclosures and lawsuits after the 2008 housing market crash, many banks are now asking applicants for information well above and beyond what was once required.

To increase your chances of getting through the process — with keys to new home on the other side — it’s a good idea to meet with lenders early. “Even before you think about shopping for a house,” Aubrey says, “you have got to sit down with a lender and demand that somebody dig through your financial life so that if there are flags, you can address them.”

Some common red flags — such as owning a small business, getting monetary gifts or writing off

work-related expenses on your work-related expenses on your taxes — can make the process laborious and reduce your chances of qualifying.

Partners in law firms, small business owners and salaried individuals with a side business can have a tougher time than most. Because small-business owners’ income is tied directly to the success or failure of their business, banks can be extra cautious before giving them a loan.

Lenders will commonly scrutinize their tax returns and only allow “taxable” income. If you make $100,000, for instance, and write off $25,000 in business-related expenses, a lender will view your income as $75,000. That reduction could make it harder for you to qualify for the type of mortgage you want, says Redfin Realtor Philip Gvinter.

This doesn’t mean that straight-salaried workers are off the hook. While applying for a mortgage last fall, Wayne Warner, 32, a government contractor, got stuck with extra paperwork when he tried to be a good husband. After taking out an advance on a credit card, Warner had to prove to the lender that the money was not going to be used to make the down payment on the mortgage. It wasn’t. “The advance was to get my wife a present for Christmas,” Warner says.

If you’re looking to get a mortgage, don’t open up new credit cards or make major purchases, Gvinter says.

Things might get a little more complicated — or at least confusing — in 2014. “There’s a tidal wave of regulations coming from [the Dodd-Frank Act] in January,” says John Downs, senior mortgage originator with Caliber Home Loans (1899 L St. NW, Suite 1050; 202-999-0211). Until they get used to the new rules, lenders will likely interpret them differently, he says.

Many homebuyers accept the rigmarole and red tape as the new norm. “I’m not surprised they were so much more stringent or had so many questions about every little detail,” says first-time homebuyer John Yeung, 29, who closed on a Mount Pleasant condo in October. “It’s a little annoying and a little frustrating that it’s so involved, but I guess it’s what I expected.”

Look HARP

There’s good news for underwater homeowners. If you owe as much or more on your mortgage than your home is worth, you could be eligible to refinance your loan with a lower interest rate through the Home Affordable Refinance Program.

“There’s still several million people in the country that are qualified and able to do a HARP refi, who haven’t done it yet,” says Realtor Mike Aubrey, host of HGTV’s “Power Broker” and spokesman for the HARP awareness campaign.

If you tried refinancing through HARP when it began in 2009 and were denied because your mortgage was vastly higher than your home was worth, try again. Under the new HARP 2.0, you might now qualify.

 

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Marissa Payne · November 20, 2013