At Brooks & Crowley, we close dozens of mortgage loans every month. In talking with borrowers, a common complaint that we hear is how much documentation had to be supplied to the lender in order to have the loan approved. Some folks who have not applied for a loan for many years, or who are helping their sons and daughters with their first homes, will talk about the “good old days” of limited documentation and even stated income loans that required little or no documentation from the borrower.
In response to the “good old days,” of lenders making loans to anyone with a pulse and a job, the mortgage lending landscape has changed considerably. The new Qualified Mortgage rules took effect in January 2014. Gone are the days when lenders would ignore certain underwriting requirements if the deal otherwise seemed promising. Now, your lender must be able to fully document that you can afford your monthly mortgage payments.
The document requirements for mortgage preapproval vary by lender and your individual circumstances, but typically, you'll need to provide documents that show your monthly income, your assets, and any regular deductions out of your income. The process does not need to be onerous, as long as you gather what you need ahead of time.
Here are the basic documents you'll need to provide to your lender for your preapproval:
- Tax Returns. Complete tax returns from the last two years, including all W-2s and schedules. This is so the lender can verify that your household income was consistent. Income fluctuation makes underwriters nervous, and too much fluctuation could lead to the denial of your loan. For self-employed applicants, the bank will likely want copies of your 1099 forms, which show how much money you received from various clients during the prior year. Combined with your last two years of tax returns, the 1099s are used to show that your self-employed income is steady over time.
- Pay Stubs. Thirty days of most recent pay stubs from your employer. This is to establish your current salary, so they must be current.
- Account Statements. Sixty days of most recent monthly statements from all bank accounts, retirement account, and investment accounts (retirement and investment account statements may be quarterly). The bank statements are used to establish how much cash you have on hand to pay for extras, and the investment account statements are used to show the bank that you have emergency funds available to use to pay the mortgage if necessary.
Once your offer is accepted, here is the additional documentation that the lender will need:
- Contract to Purchase. The signed purchase and sale agreement lays out the operative terms and dates concerning the closing. If there is to be any seller credit for closing costs, this must be included in the purchase and sale agreement so the lender is made aware of it in advance of the closing.
- Evidence of Homeowner’s Insurance. A homeowner’s insurance binder with coverage running for one year after the closing that lists the lender as mortgagee.
- Verification of Employment. If requested, verification of your position and salary by your employer on company letterhead. As the closing draws near, the lender will also obtain a VOE (verification of employment) where they contact your employer to verify that you haven't lost your job since the time you applied for your mortgage.
- Rental History. A year’s worth of canceled rent or utility checks, especially from first-time buyers to prove you have a history of on-time payments.
- Proof of Down Payment and Closing Funds. Documentation for your down payment must always be given. You can’t use any undocumented funds for your down payment, such as gambling winnings or mattress money. Similarly, you can’t use funds from credit card advances for either your down payment or cash to close. If you have any unusual deposits into your account, they will need to be documented with deposit slips and an explanation. For example, if you sell your motorcycle and deposit the funds into your checking account, the bank will want to see a copy of the bill of sale (and the deposit amount and date had better match the information on the bill of sale). In a nutshell, any sudden change in your finances (for better or worse, but especially better) will need to be explained, and if you cannot document it, it likely will not be counted toward your available assets to close. If someone is giving you a financial contribution to help pay closing costs or down payment, you'll need to provide the lender with a "gift letter" from the donor. Lenders want to avoid any possibility that there is a secret mortgage on the property, so the gift letter states that the funds were a gift and do not need to be paid back. Additionally, the donor will need to provide documentation, such as a bank statement, as to the donor’s source of the funds.
- Other Explanatory Documentation. If you have any unusual income or circumstances, you'll need to provide other documents. For example, if you have rental income, copies of the leases will need to be provided. If you're divorced, the separation agreement and/or divorce judgment will need to be supplied. If you filed bankruptcy, copies of the discharge order need to be submitted.
Simply put, during your mortgage application process, your finances will be under a microscope for a period of time. But if you take a little time to gather the necessary documentation beforehand, you will avoid having to scramble at the last minute or risk delaying your closing. For more information about real estate matters, contact us today.