Q: I’m applying for a mortgage through my credit union and I’m a bit surprised at the amount of information they’re asking for to process my loan. Why do they need to know so much about me to grant me a home loan?
A: Exhaustive research into the financial, personal and credit history of home loan applicants is not unique to credit unions. Every home lender will request similar information to process the loan.
But knowing that the deep digging is intrinsic to home loans doesn’t make it easier to understand. You might have expected your lender to ask for basic financial documents, like your recent pay stubs. But, when they started asking if you were ever involved in a lawsuit, you may have started getting uneasy.
Why are lenders so nosy?
Actually, they’re not. They’re only trying to satisfy the criteria for a protected mortgage, or a Qualified Mortgage. And all this need for deeper level questioning is fairly recent, too.
In January 2014, the Consumer Financial Protection Bureau (CFPB) introduced the Qualified Mortgage (QM), a loan category that protects lenders from being forced to buy back the loan if the borrower defaults. To qualify, the lenders must follow the CFPB’s guidelines when determining a buyer’s eligibility for a mortgage.
Essentially, lenders are protecting themselves through this process. That’s why most lenders will try to make a home loan eligible for a QM whenever possible.
The law dictates that lenders must be able to prove they followed the CFPB’s ability-to-repay guidelines when verifying whether a borrower is able to repay the loan. The more proof the lender has for the buyer’s reliability and good financial standing, the more protection they have.
That’s where all that intrusive questioning and document-digging comes into play.
While the QM is designed to protect the lender, it will also protect you, the borrower. When a lender is super-careful to determine that you can easily carry a loan’s terms, you’re protected from being stuck with a mortgage you can’t really handle.
Qualified Mortgage rules
Aside from the heavy documentation and investigation into the borrower’s financial and personal history, QMs come with the following rules, as dictated by the CFPB:
- Mortgages cannot have loan terms that exceed 30 years.
- Mortgages cannot involve negative amortization, or a condition in which the amount owed increases because the borrower is only paying toward the loan’s principal and not its interest.
- Mortgages cannot include balloon payments, or larger payments only going toward the loan’s interest, that are paid toward the end of a loan’s term.
- Mortgages have specified limits on a the borrower’s debt-to-income ratio and the amount of upfront points and fees a lender can charge the buyer.
What will my lender ask for?
Every lender will need a full paper trail; if your lender is trying to make your mortgage eligible for a QM, the list will be even more exhaustive. Of course, in today’s digital age, hardly any of this paperwork will need to be actual hard copies.
Here’s a list of documents you will likely need to provide for your lender:
- Financial account statements from the last two months and