Reader question: “I have heard that most mortgage lenders are going to be using the QM guidelines next year when approving people for loans. I’m wondering how this will affect the pre-approval process for borrowers. I have read up on the subject (pre-approval) but it seems like everything could change between now and when I am ready to apply for a loan next year. Can you shed some light on this?”
Unfortunately, I can only shed a glimmer on the subject. The details surrounding the qualified mortgage (QM) rules are still being hammered out. As of right now, we don’t know exactly what the final rules will look like, or how they will affect mortgage origination, pre-approval and underwriting. The Consumer Financial Protection Bureau (CFPB) has a January deadline for finishing the rules. We’ll know more then.
With that being said, I don’t expect any major changes in how lenders pre-approve borrowers. The qualifying criteria may change a bit, once the QM rules are finalized. But the pre-approval process itself will probably be similar, if not identical, to what it’s like right now. Lenders are already doing most of the things that will be required under QM — verifying income, assets, debts, etc. So in some ways, it will be business as usual.
Mortgage Pre-Approval in a Nutshell
I’d like to back up for a minute and explain what it means to be ‘pre-approved’ for a home loan. Some of our readers may not be familiar with the process. Most people who buy a home have to use a mortgage loan to cover most of the cost. But not everyone can qualify for such financing. Some borrowers have too much debt, too little income, or too many credit problems to qualify for a home loan. In such cases, there’s really no point in house hunting.
You need to find out where you stand with financing, before you spend countless hours shopping for a home. And that’s where the mortgage pre-approval comes into the picture.
Pre-approval is a fairly straightforward process, though it does require a good deal of paper shuffling. The lender will review your financial situation to determine (A) if you meet their minimum criteria and (B) the amount you are qualified to borrow. They do this by examining your credit score, your income and employment status, and your debt level. They will consider these factors in relation to the amount of money you’re trying to borrow. Finally, the lender will make a determination, either pre-approving you for a mortgage loan or turning you down.
If you get pre-approved, you can get yourself a real estate agent and start the house hunting process. Sellers and their agents will take you more seriously if you have a pre-approval letter in hand. It makes you more of a known quantity, in terms of financing. After you find a home and make an offer to buy it, you would go back to the lender for the final approval (ideally). This is typically how it works.
The QM Factor
Lenders have tightened up their criteria since the housing market imploded. They now require full documentation of income, employment, assets and debts. They are evaluating borrowers’ debts in relation to their income. In short, they are doing most of the things the qualified mortgage rules will eventually require them to do. As a result, the QM rules may not shake up the mortgage world the way some people fear. It could have a very minimal impact on the pre-approval process.
Of course, much is still unknown. The Dodd-Frank Act says that lenders must verify the borrower’s ability to repay the loan. It’s one of the key concepts of the qualified mortgage. But it doesn’t say how lenders must do this. We can assume it will include the standard documents required by lenders — tax returns, bank statements and the like. But again, most lenders are requiring all of these documents already.
For now, we will have to take a wait-and-see approach. The rules should be finalized by the end of January 2013. We will know more then, and you can rest assured we will share it here on the blog.