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Loans: Why Are They So Complicated?

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Posted On: 12/09/2015

QUESTION:

We recently applied for a mortgage, and the experience was terrible. We were asked for a lot of paperwork and then were asked for more paperwork. Why don’t lenders simplify the system so that financing a house is as easy as getting a car loan or financing for a refrigerator?

ANSWER:

I suspect this is not what you want to hear, but lenders actually are doing you a favor by getting your loan application right. To do this they have to document all the claims made in your loan application and they have to verify a number of related items as well.

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If this seems excessive then consider the alternative: In the period between 2000 and 2007 it was fairly easy to get so-called “nontraditional” mortgages that required little or no documentation, and in some cases borrowers could pretty much guess their income. While this may sound heavenly for anyone trying to get a loan, the fact is that such irresponsible underwriting standards were at the heart of the mortgage meltdown, the loss of some 7 million homes to foreclosure, and continuing weaknesses in the housing sector even to this day. For instance, Marina Walsh, vice president of industry analysis with the Mortgage Bankers Association, said in August that “legacy loans continued to account for the majority of all troubled mortgages. Seventy-three percent of the loans that were seriously delinquent, either more than 90 days delinquent or in the foreclosure process were originated before 2008, even as the overall rate of serious delinquencies for those cohorts decreased.”

A 2014 report found that most loan application files contain at least 500 pages of material. That may seem like an insane amount of paperwork, but if you look closely at the numbers you will see that loan files include a number of thick documents that contain a lot of pages that borrowers don’t actually prepare, including sale agreements, appraisals, credit reports, bank statements and appraisal reviews.

Lenders want a lot of paperwork to assure that they’re meeting all investor and insurance requirements, in addition to all the requirements established under the Dodd-Frank Wall St. Reform and Consumer Protection Act. The central purpose of such thick files is to assure that in the future they’re not sued if a standard has not been met or a loan goes bad.

Equally important, you as a borrower want to assure that your loan application is fully documented to avoid any future claims of impropriety or mortgage fraud. This is why it makes sense to gleefully give your lender all required paperwork – and to keep copies for yourself.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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