Published on March 30, 2017
In “The Big Short,” a movie in theaters which uses an all-star cast to chronicle the 2007 collapse of the U.S. housing market, there’s a warning for all future homebuyers: Understand the contract before you sign.
One scene, in particular, underscores the point. In the lead-up to the housing crash, a hedge fund manager named Mark Baum (played by Steve Carell) visits Florida to see the housing bubble firsthand. He speaks to a young woman and learns she owns five homes. But here’s the kicker: The woman doesn’t realize that when her adjustable rate mortgage (ARM) goes into effect in 2007, it will likely increase her mortgage payments more than 200 percent.
In that moment, Baum comes to a shocking realization: A housing crash is imminent because too many people have mortgages they likely can’t afford.
Flash forward to 2015. This past October, the Consumer Financial Protection Bureau simplified the loan process when it condensed four different disclosure forms into two and made the lending documents easier for home buyers to comprehend.
At the same time, it’s important for homebuyers to ask their lender the right questions before they sign on the dotted line. Questions such as:
1. Is my mortgage rate fixed or adjustable? Meaning, will the rate change over time?
2. What’s included in my monthly mortgage payment?
3. Are you charging me origination or discount points for my mortgage rate?
4. Do I have mortgage insurance, and if so, what are the terms?
The collapse of the housing market had a chilling effect on the economy and made people fearful of major investments such as the purchase of a home. As a lender who regularly walks people through the mortgage process, I can tell you the system today is highly regulated and designed to protect both the lenders and homebuyers.
Buying a home is still one of the best — if not the best — long-term investments. That’s why I believe “The Big Short” isn’t meant to scare people away from homeownership. If anything, it demonstrates how far the system has come, and why you should again have confidence in the lending institutions.
As you begin the home-buying process, gather recent salary and tax documents and be prepared for a thorough check on your financial history. Be sure to ask your lender the questions I outlined above and anything else that doesn’t make sense to you. You have every right to know.
Bottom line: The lenders need to be 100 percent sure you can pay your mortgage. And before you sign your name and pick up the house keys, you need to be certain, too.
Written by Shikma Rubin, Tidewater Home Funding