Why are Mortgages taking so long to process?

Anyone trying to buy a new home or refinance their current mortgage, may be wondering why mortgages are taking so long to process. While historically mortgages could be processed in as little as 4 weeks those timelines are stretching and looks like they will continue to be extended for the foreseeable future.

But why is that? How come things take so much longer now than they used to?

It’s a combination of factors that are making mortgages take longer to process now than they used to.  To understand the details we should first look at what’s involved in mortgage processing.

The Mortgage Application Process

The mortgage application process consists of several steps. It starts with an application.   As part of that process, applicants must provide a good deal of documentation including such things as:

  • Paystubs for the past 30 days
  • Previous 2 year’s W-2’s and/or 1099’s
  • Social security and/or retirement award letter, if applicable
  • Complete tax records for the past 2 years if you are self-employed, work for a family member, receive commission or large bonus income
  • 2 months of bank statements

These are only some of the documents that you may be asked to provide depending on your particular financial situation. Accurately completing and collecting of all these documents is one of the first places that your mortgage can get bogged down. It’s important to make sure that you have signatures in all of the right places and that you have all of the documents assembled before submitting your package. This will help keep things moving along. Every time your mortgage partner needs to come back to you to fix or fill in missing details, your time to complete the process runs further away.

Onward to Underwriting

Once all of the documents are assembled and accurate your application moves to underwriting. It’s here that all the information you have provided is reviewed. This review determines whether you are a good risk for a mortgage. Underwriters assess your application based on the 3 C’s; credit, capacity, and collateral.

Your credit score provides a baseline assessment of your past ability to handle and manage credit. Underwriters are looking to make sure that you have a positive payment history and aren’t delinquent on any current loans, credit cards or other bills. They want to make sure that you fulfill the financial obligations that you have made before they decide to provide you with a new loan.  

The second C is capacity. This looks at your ability to pay based on your income, savings, and other assets. It also considers your current debt-to-income ratio, or DTI. It starts by looking at how much money you make, how much money you have in the bank, and your investments in other areas. These numbers are compared to your outstanding current debt, also taking into consideration calculations for things like standard living expenses. The lenders wants to be comfortable that you will have enough money to make new loan payments in addition to the spending you are already responsible for.

The final C is collateral. This is an evaluation of the property itself to ensure that the size of the loan is appropriate for the value of the property. Being able to provide details on the down payment that you are making for the property is also important.

Another part of the review process is a title search. A title search and review is done on the property records. This is to make sure that there are no liens, claims, unpaid taxes, judgments or other things like unpaid homeowners dues against the property itself. This title review provides protection both for you and for the lending agency.

Limits to Automation

While both underwriting and title searches have become increasingly more automated there are still people involved in conducting this work as part of the mortgage process.  In these sectors, just like in the rest of the economy, the COVID-19 shutdowns reduced the amount of available personnel to be doing this work during the early months of the pandemic. This created a backlog of work in the processing of applications.

The lack of capacity for processing of loans earlier in the year is part of the reason things are taking so long right now. A bigger contributing factor however is the increase in demand, which has skyrocketed since the start of the COVID pandemic.

Why is there so much demand?

One of the reasons for the increased demand is the very low interest rates available today. In an effort to keep the economy moving with the onset of the COVID-19 crisis, the FED has continued to lower interest rates. Interest rates on conventional mortgages fell to below 3% for the first time in July and they’re still hovering near that 3% mark today.

With interest rates so low and the overall economic outlook uncertain, many current homeowners have seized the opportunity to reduce their interest rates and drop their monthly payments. Sometimes in combination with pulling cash out of their home equity to help manage other expenses or provide additional financial security. Forbes reported that in mid-July, refinancing activity was up 122% over last year. Looking at a longer period, the Pittsburg Post-Gazette reported that for the second quarter of the year, refinance activity in 2020 was 200% higher than in the second quarter of 2019. And that increase means a lot more work for the folks processing applications.

These low interest rates have also enticed many renters to begin looking for a first home to buy. As people are looking to move out of cities into suburbs to avoid the worst effects of high-density living on coronavirus transmission, low rates make it more attractive. Additionally, the peak of the millennial generation is hitting 30 this year and so are entering their prime homebuying years. That’s a lot of potential new buyers driving demand for new mortgages at a time when the refinancing demand has already pushed the industry beyond normal demand.  

On top of these low rates, bank deposits are rising and Americans have been doing a good job in recent years with reducing consumer debt, putting home ownership in the reach of more people. And the pandemic may be helping to increase this trend. The Federal Reserve Bank of New York reported that household debt dropped by $34 billion in the second quarter of this year. With fewer outlets for spending available, it seems that many Americans have been paying off their credit cards, home equity lines of credit and student loans.

This Perfect Storm May Cause Delays

All of these factors taken in combination – available funds, low interest rates, limited staffing and a necessarily complex application and qualification process – are resulting in very long days for the people working in the mortgage market today.

Delays may be hard to avoid no matter who you choose to work with. Your best approach to getting your mortgage completed as quickly as possible is to be patient, thorough, and pay attention to the details. Knowing all the steps that are involved in the process can help you understand where your application is at. And spending the time to get your documentation completed right the first time is a great investment to simplify the rest of the journey.