Buying your home post 2008 crisis? Expect changes.
It’s been about 10 years since the financial crisis of 2008 took a devastating effect on the U.S. housing market, comparable to the Great Depression. At the time, it was national news and disrupted the lives of countless homeowners – in fact, we all know at least one person who lost their savings, home, job and/or relationships. Whether you experienced the crisis first or second hand, time has a way of fading the memory and softening the blow. However, banks, lenders and real estate brokers have not forgotten. Welcome to purchasing a home in the new era, post 2008 crash.
While it may seem obvious that processes have changed and regulations have tightened up considering our not-so-distant history, some clients still seem surprised by today’s home-purchasing protocols. So, if you are not new to buying a home, but you are new to buying one after the crash, expect changes, especially concerning the mortgage process. First, let’s review some of the reasons why things have changed, regarding the financial crisis and other factors.
How the Bubble Burst
Leading up to 2008, mortgage lenders were encouraged to give subprime loans to homeowners. A subprime loan is “a loan offered to people who do not qualify for a conventional loan, either because of low income, a high loan-to-value ratio, or poor credit history,” per lendingtree.com. On top of that, these loans were easily booked without lenders performing due diligence to confirm whether borrowers were qualified candidates. For example, many lenders would obtain borrowers’ income qualifications by “stated income” – aka: simply taking their word for it without proof.
To make matters even worse, lenders would also give loans on a property up to 125% – that’s 25% more than the property was worth! So, if a home was worth $100,000, a mortgage could be approved on that home for $125,000 to a borrower that just says they earn [XX] a year.
During the same time, home prices soared and homeowners started using their properties as “piggy banks” or ATMs, refinancing or adding a second mortgage/line of credit on their homes to pull out quick cash. Once housing values started to fall (which is normal for values to go up and down), prices on mortgage-backed securities plunged, promoting large losses for lenders and banks. With the financial industry in turmoil, interest rates started to rise, and borrowers had a hard time paying their mortgage payments. Some even walked away from their homes, creating foreclosures.
Following the financial crisis, the lending industry had to learn from its mistakes and revamp. Now, lenders and banks take the process very seriously, upholding new standards and regulations to help avoid the downfalls of 2008. Banks are no longer accepting an applicant’s word on their income or debt amounts. They are requiring proof. With actual proof, comes more red tape, paperwork, hurdles and back-and-forth that can be frustrating for both REALTORs and clients.
Important Note: even if your credit is near perfect and you make a killer income, you are not subject to special treatment in the bank’s eyes. On a personal level, I’d love to give you a high five for being responsible and working hard! However, all of the regulations above still apply to you, unfortunately.
California – Where People Lawyer Up
Outside of changes in today’s lending process, real estate protocols have reformed over time due to legal issues. With every lawsuit that has occurred (and trust me, there have been many), the state of California, Realtor’s Association and brokers often need more disclosures, signatures and requirements to avoid future lawsuits. This is designed to not only protect themselves, but to protect their clients too. For example, many years ago, the Purchase Contract (an agreement that is used to place an official offer on a home) was a single page document with a small section of standard text followed by blank lines, so an agent could write in terms and conditions. Today, it’s a 10-page document that comes with multiple addendums, supporting documents and various disclosures. Not only that, most of today’s contracts are handled 100% electronically and signed via programs like DocuSign® – including counter offers, requests for repairs, etc.
What Home Buyers and Sellers Should Keep in Mind
While I hope this article is eye opening or at least acts as a good reminder for how we got here, I know it can sound overwhelming to both new and current home buyers. Here are some key takeaways to keep in mind:
1. It takes a village to buy or sell a home
Your REALTOR and lender are on your team to help you buy or sell a home. This also includes their associates, which are at least 10 people working for you behind the scenes during the escrow/loan process. They want you to be successful because that is typically a reflection of their dedication to partner with you. While today’s regulations can seem excessive and sometimes annoying, a great REALTOR is well aware of them and will expertly anticipate and guide you through all mandated processes.
2. Lending and legal regulations are there to protect you
Before 2008, no one was thinking about the ramifications of lending 125% of a home’s worth to a low-income individual with poor credit, who simply stated they could afford their inflated payments on their first, second and third mortgages. Today, that person would not qualify for the same home loan – perhaps saving them from future bad financial decisions.
3. Banks ultimately want your business
The offerings that make banks competitive these days are interest rates, application fees, customer service and special programs – but it’s not the amount of paperwork you’ll have to go through. Having to provide proof of income and go through loads of documentation will happen at any legitimate financial institution, because most abide by the same guidelines and regulations. Your lending professional should guide you through all recommendations and necessary steps to tone down the headache as much as possible.
4. In lending, one thing can lead to another
For example, the lender may ask a borrower for tax returns, and upon reviewing them, may find some items that were previously undisclosed, such as rental property income. This discovery will lead the lender to request documentation on the rental property, even if this income is not needed for the loan. This is all very common – and a good lender will help you anticipate what processors and underwriters may ask for.
5. Buying or selling a home can be an emotional rollercoaster
This is completely normal. There are ups, and there are downs. There are times when you think the deal isn’t going to work out – but a good REALTOR will always be honest and upfront to help facilitate the next move or provide solutions to any problem. In the end, arriving at your home destination is always worth the journey – so hold on tight and trust in the process.
As the old saying goes, “change is the only constant.” Here’s to helping you, your friends or colleagues buy or sell a home in the new age – as painlessly as possible.
If you have lending questions or need real estate advice to purchase or sell a home in San Diego County, email or call Michael Biondo at 619-993-9559 to get started.