Mortgage
applications can be time-consuming and tedious because after all,
there’s a lot of money on the line.
Lenders devised the mortgage application process to collect
proof that shows the borrower can and will repay the loan in a timely manner.
This proof includes everything from how much money you earn to your repayment
history.
You might have to answer tough, personal and seemingly
trivial financial questions. The best thing you can do is to be prepared.
“You should be ready to explain any discrepancies in your
credit history such as late bill payments, being turned over to a collection
agency, or a bankruptcy,” says Don Boop, mortgage loan originator at Linear
Home Loans. “It’s a good idea to have dates, amounts, and causes ready if you
think these situations will come up.”
Before you apply, familiarize yourself with the required
documents and questions asked on mortgage applications. Better still, get your
documents ready and consider obtaining preapproval from a lender to speed the
process once you identify a potential home.
Here’s a list of questions you can expect:
Employment and income
Where do you work?
How much do you make? (You’ll be expected to document
income with copies of IRS tax statements, as well as giving the lender
permission to request your tax return transcript. If you collect a paycheck,
you’ll provide copies of pay stubs and W-2s.)
How long have you been at your job?
How is your income derived — steady salary or irregular
income? (If your income varies, you may need to provide details.)
What works in your favor
You can prove steady employment (two or more years) with
the same employer or in the same line of work.
What complicates an application*
You are self-employed or a contract worker.
Debt
What recurring debts do you have? This includes auto loans,
alimony, student loans, and credit cards. (You might be asked to document your
recurring debts by providing copies of your bills.)
What works in your favor
Your monthly debt payments account for 36 percent or less
of pretax income, and you haven’t made a major purchase (like a car) recently.
What complicates an application*
Your credit cards are maxed out or your monthly debt
payments account for more than 36 percent of your pretax income.
Savings and assets
How much money do you have in the bank?
How much do you have saved in 401(k), stocks, bonds, mutual
funds and other investment accounts? (You will be asked to provide copies of
brokerage statements.)
What works in your favor
You can show that, after closing, you will have at least
two months’ worth of mortgage payments in the bank.
What complicates an application*
You will have little cash in the bank after the down
payment and closing costs.
Down payment
What is the size of the down payment?
Where does the down payment money come from — is it all
from your savings, or did some of it come as a gift from family or a grant from
a nonprofit? (You will have to document the source of your down payment by
providing copies of several months of bank and brokerage statements, and
letters from any gift-givers and grant makers.)
What works in your favor
The down payment comes from savings or from equity from a
home that you’re selling. Even better: The down payment is 20 percent or more.
What complicates an application
You have trouble documenting where your down payment money
comes from.
Loan purpose
Are you borrowing to buy a home or to refinance the current
mortgage?
If it’s a refinance, do you want to take cash out at
closing? If so, how much?
What works in your favor
The loan is for a home purchase or a simple rate-and-term
refinance, without taking cash out.
What complicates an application
You’re getting a cash-out refinance.
Property use and type
What’s the address?
Do you plan to live in the house year-round, or is it
investment or vacation property?
Is it a house, duplex, condominium or co-op?
What works in your favor
The house is a detached single-family home to be used as a
primary residence.
What complicates an application*
The property is a duplex or condominium, to be used as a
vacation home or to rent out to tenants.
* “Complicated” doesn’t mean “impossible.” It means you
might have to provide more documentation, the loan decision might take more
time and you might have to pay a higher interest and or fees. You might face
more hurdles and questions than a borrower with a simpler loan application.
What documents are needed to buy a home
Anticipate backing up every claim you make on your mortgage
application with documentation. Then you won’t feel so overwhelmed when you
must chase down W2s and 401(k) statements.
Document requirements vary by applicants and lenders. But
if, for example, you have an IRA or income from rental property, chances are
you’ll need to prove it.
Proof of income
A lender wants to know that you’ll be able to repay the
loan. At minimum you’ll need to provide:
The previous year’s W-2 form.
Your most recent pay stub.
Your tax returns from the past year.
Depending on your income history and the size of the loan,
you may have to show additional paperwork. For example, getting a mortgage
when you’re self-employed often requires even more documentation, like profit
and loss statements from your business or 1099 forms if you work on a contract
basis.
Earnings outside of a regular job
If you make money from other sources, you’ll need to
provide detailed information about that, too. Someone who receives child
support or alimony will likely have to show the lender a copy of the divorce
decree. Someone who earns income from a rental property may be asked for a copy
of the lease agreement.
Debts
You’ll have to put together a complete list of all your
debts, including credit cards, student loans, car loans, alimony and child
support payments, along with statements that show balances and the minimum
monthly payments.
Assets
Be prepared to present an inventory of assets including
bank statements, investment records, retirement accounts, real estate, and auto
titles, and any other major items of value.
The bank wants to be sure you have enough savings to
weather any unexpected expenses after you close on the house. They may also
want proof that you paid the down payment from your own account and not as a
loan from someone else.
Other paperwork
You may have to sign an IRS Form 4506-T, which allows the
lender to get a transcript of your tax return from the IRS. In some cases, the
lender wants to see that what you declared to them matches what you declared to
the IRS. The form verifies that all the information on your W-2, 1099 or 1040
matches what’s on your loan application.
If you had a bankruptcy within the past several years, you
may be asked for your bankruptcy discharge papers. In some cases, a bankruptcy
can appear on your credit report for up to 10 years. Even if you’ve been on
sound financial footing since then, a lender will want to see that you’ve
settled with your creditors.
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