Mortgage applications can seem overwhelming due to all the documents that are needed in the process. As a mortgage originator, I’m often asked by clients, “why do I need all that paperwork?” I assure them that the documents are needed to keep us both safe.
How does mortgage paperwork keep homebuyers safe?
Homebuying hasn’t always been such a well-documented process. In the past, lenders tried to simplify the process by requiring as little documentation as possible. This all changed with the housing crash around 2008 that effected so many Americans. After the crash, the government created the ability-to-repay rule, which requires lenders to make sure borrowers can pay back their loans. Under that rule, lenders must collect, consider, and document a borrower’s income, employment, credit, assets, and liabilities/expenses. This process was put into place to help and protect the consumer.
The mortgage process will always start with the Uniform Residential Loan Application. This may be a paper or an online application. The application is a way for your lender to get to know you. It allows them to find out who you are, how much you want to borrow, what type of home you want, and how stable your financial situation is. They will then ask you to verify the information you provided on the application.
Lenders want to work with people who have a stable income because it increases the likelihood that the borrower will repay the mortgage. In order to assess your financial stability, your lender may ask for the following items:
Pay stubs (two weeks)—This provides proof of employment, the name of your employer, and how much you earn.
W-2s (two years)—If you don’t have copies of your W-2(s), check with your employer or ask the IRS for copies of the documents you submitted with your tax returns. If you have employment gaps within the last two years, your lender may ask for a written explanation.
Income tax returns with all schedules (two years)—Lenders may ask you to provide copies of your returns along with signed Form 4506-T, which gives the lender permission to obtain your tax transcript directly from the IRS.
Retirement and Social Security income statements—Lenders will ask for a copy of Social Security or pension benefit statements, 1099 tax forms, or bank statements to verify what you have received and what your benefits will be for the upcoming year.
Self-employment documents—You’ll need to provide a few additional documents if you’re self-employed. This may include profit and loss statements and two years of federal tax returns (both personal and business).
Alimony and/or child support documents—If you rely on this type of income, you’ll need to provide a copy of the court order(s) along with 12 months of receipts verifying you are receiving the income.
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Assets and Debts
Lenders will use your debt-to-income ratio to determine whether you will be able to pay back your loan. As the name suggests, this requires comparing the amount of debt you have to the amount of income you make. They will also want to make sure you have the assets to be financially sound after paying the down payment and closing costs associated with the mortgage. They are generally looking for you to have at least two months of mortgage payments, taxes, and insurance in reserve. On the mortgage application, you’ll list all monthly debt payments (such as auto loans, student loans, credit cards, and any existing mortgages) and assets (such as bank and investment accounts). The lender may also ask for the following documents to support these debts and assets:
Bank statements—Your mortgage lender will typically ask to see two months of bank statements to verify savings balances that will be the source of your down payment and closing costs. If there are any large deposits, your lender will want documentation that explains where the funds originated.
Retirement and investment account statements—You’ll also need to supply two months of statements from any investment accounts you listed on the loan application. This includes individual retirement accounts (IRAs), 401(k)s, stock investments, and certificates of deposit (CDs). Submit every page, even blank ones.
Gift letter—Some loan programs allow you to use gift funds to cover the down payment or help with closing costs. If you receive gifted funds from a relative or friend, they will need to sign a gift form confirming they don’t expect repayment and it is a bona fide gift.
Credit report—Your lender will pull a credit report from all three credit bureaus, which will give them three credit scores. Your credit score represents how likely you are to repay debt (aka the risk that your lender is taking on you). The higher your score, the less risk your lender takes. The lower your score, the higher the risk your lender takes. The credit report will provide your payment history, what you have for current obligations, whether you have collections or judgments and if you have any derogatory items. If your lender has any concerns, he or she may ask for a letter of explanation.
Your lender may ask for additional items to help them understand who you are and how you are doing financially. These items may include rent verification documents, copies of bankruptcies or foreclosures, non-citizen documentation, non-traditional credit references from utilities or insurance companies, or other financial documents.
As you prepare to buy a home, it will be helpful to organize your documents. Use the checklist offered below to find the documents you’ll need. Lenders will often accept electronic documents, so scan your paper documents as PDFs. If you prefer to work with paper documents, make copies before you submit them to your lender. The more prepared and organized you are, the easier it will be for you and your lender as you close on your home.
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