Mortgage Pre-Approval Process to Be Affected By New Rules in 2013

Do you plan to get pre-approved for a mortgage loan in 2013? If so, you better start rounding up your financial documents. Some new rules announced by the federal government in January could affect the mortgage pre-approval process going forward. Here’s what you need to know about it.

Last month, the Consumer Financial Protection Bureau (CFPB) introduced a new set of rules for mortgage lenders in the United States. One set of rules will take effect this year, in 2013, while the other has been scheduled for a 2014 implementation. The new rules for 2013 have to do with the borrower’s ability to repay. In short, mortgage lenders must verify and document the borrower’s financial ability to repay the debt.

What does this have to do with the mortgage pre-approval process? In a word, documentation. Lenders will require a wide range of financial documents in order to satisfy the requirements of these new rules.

I’ll explain how this affects borrowers in a moment. But before we go any further, let me offer a basic definition:

Based on this review process, the lender will determine two things:

1. whether or not you are qualified for a home loan by their standards, and…
2. how much of a mortgage they are willing to lend you.

It’s common for home buyers to get pre-approved for a mortgage before starting the house-hunting process. In fact, many real estate agents use this as a minimum requirement when taking on new clients. Real estate agents want to see that a person has been pre-approved by a mortgage lender before they invest the time and energy needed to help them find a home. And frankly, I don’t blame them.

While pre-approval is not a guarantee of financing, it does indicate that the prospective borrower meets the lender’s minimum standards.

What’s New in 2013

The federal government’s new “ability-to-repay” rule will affect the mortgage pre-approval process in several ways. As mentioned earlier, these rules require lenders to verify the borrower’s ability to repay the mortgage debt. This verification will come in the form of documentation – and plenty of it.

When you undergo the pre-approval process, your lender will request a veritable mountain of paperwork. They will want to see bank statements, pay stubs, tax returns, W-2 forms, and other documents relating to your income and debt. Many first-time home buyers are shocked by the amount of documents they must produce during pre-approval. The purpose of this article is to prepare you for that process, and to eliminate such surprises.

It makes sense for mortgage lenders to verify the finances of their customers. In fact, you might even wonder why the federal government had to step in to create these new rules in the first place. But if we look back a few years, we can see the need for such legislation.

During the housing boom, lending standards in the U.S. became lax. That’s an understatement. In truth, almost anyone with a Social Security number and a little money in the bank could qualify for a home loan. You didn’t even have to document your income or assets. You could use a no-doc or low-doc loan and simply declare your monthly income. The ability-to-repay rule prohibits these kinds of risky lending practices. So we’re essentially getting back to basics.

How to Prepare for the Mortgage Pre-Approval Process

We talked about mortgage documents already. This is one of the first things you can do to prepare yourself for the mortgage pre-approval process. But you know the lender is going to request a wide variety of financial documents. So you might as well start rounding them up early. It will save you time and energy later on, when it comes time to apply for the loan.

Start with the documents mentioned above: tax returns, bank statements, pay stubs, W-2 forms and the like. Your lender will give you a complete list of the required documents when you apply for pre-approval. But it always helps to get a head start.

I also recommend that you check your credit reports and scores before getting pre-approved by a lender. This is another one of the things the lender will check during the pre-approval process. They will check your credit score to see how you have borrowed and repaid money in the past. A high score indicates a pattern of responsible borrowing, and will therefore improve your chances of getting approved for the loan. A low score indicates that you have had trouble borrowing and repaying money in the past, and will hurt your chances of getting approved for the mortgage. So it’s a good idea to know where you stand.

Lastly, I recommend that you create a housing budget for yourself. This won’t influence the lender’s decision in any way. In fact, you could go through the entire mortgage pre-approval process without creating a budget of any kind. But it’s a smart step that could prevent affordability problems down the road. You can learn more about the budgeting process in this article.