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Why Is There So Much Paperwork To Get A Loan?

Shannon Jones

Shannon Jones has been selling real estate since 1998 and specializes in listing and marketing homes...

Shannon Jones has been selling real estate since 1998 and specializes in listing and marketing homes...

Feb 9 3 minutes read

Fair warning: If you plan to apply for a mortgage when you buy a home, there's a lot of paperwork. Many people wonder whether all that paperwork is really necessary. 

It may seem like the lender needs to know everything about you and requires three separate sources to validate each and every entry on the application form.

Those buyers who went through the process in the past, when there were loans that require less documentation, or those who've talked to others who didn't require so much may be thinking that the process was a hundred times easier ten to twenty years ago.

There are two very good reasons that the loan process requires more paperwork now than perhaps any time in history.

1. The government has set new guidelines that now demand that the bank proves beyond any doubt that you are indeed capable of paying the mortgage.

During the run-up to the housing crisis, many people ‘qualified’ for mortgages that they could never pay back. This led to millions of families losing their home. The government wants to make sure this can’t happen again.

2. The banks don’t want to be in the real estate business.

Over the last seven years, banks were forced to take on the responsibility of liquidating millions of foreclosures and also negotiating another million plus short sales. Just like the government, they don’t want more foreclosures. For that reason, they need to double (maybe even triple) check everything on the application.

However, there is some good news in the situation.

The housing crash that mandated that banks be extremely strict on paperwork requirements also allowed you to get a mortgage interest rate around 4%.

The friends and family who bought homes ten or twenty years ago experienced a simpler mortgage application process, but also paid a higher interest rate (the average 30-year fixed rate mortgage was 8.12% in the 1990s and 6.29% in the 2000s).

Instead of concentrating on the additional paperwork required, focus on the fact that mortgage rates remain at historically low levels. 

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