Completing a mortgage application is never easy, even if you've done it before! You'll have to submit lots of documents and waste hours finding the necessary documentation, scanning pages and pages so ultimately you can upload all these documents to the lender you've picked. You can fight the bureaucracy or recognize that reviewing your financial health has benefits too.
Ready to look at your financial health from the perspective of a lender? As there really is logic behind what can feel like a laundry list of document requests. In fact this article was prompted by my own frustration submitting multiple mortgage applications. Why?
When you shop for your mortgage, you look for the best deal. The best deal combines the interest rate and other origination charges which the APR will reflect. But you've got to lock the rate! But the six month schedule from signed contract to closing is now nine months for the house I'm building in Florida. After monitoring interest rates for two months, I decided to submit multiple applications so when drywall is complete, I can lock in the best rate.
Here's what mortgage lenders are trying to determine with the documents requested:
- Verify consistent, stable income to insure you're able to make your mortgage payments on time.
- Confirm you have enough assets, including the down payment, to afford the loan you're requesting.
- Review other debt (car loans, student loans, etc) to make sure it won't affect monthly mortgage payments.
- Documentation about the home your buying (or re-financing).
- Documentation to prove you are who you say you are … really!
So here are the types of documents I recently provided to two lenders, plus the production builder who required me to go through their loan qualification process in order to buy one of their houses.
Mortgage Application: Proof of Income
Many of the mortgage application rules are set by the government agencies, Fannie Mae and Freddie Mac, which buy mortgages. They require monthly income which is a challenge for retirees which may use other sources of income. So I was forced to take early withdrawals from my IRA to create what I called “pretend income” to support my mortgage application. Once I close on the house, I will stop these withdrawals.
- Tax returns – Lenders want to see your last two or three tax returns, to confirm reported income is consistent year-to-year. They may ask you to provide the returns or alternatively, have you sign IRS form (4506-T) so they can get your tax returns directly from the IRS.
- W2s and proof of income like pensions and IRA distributions – are needed to support your tax returns and document income sources included there. What I've found confusing is how they treat retirement income more strictly than employment income. I've been asked to provide letters documenting how long I will receive my pension (until I die) and verification that I can maintain my IRA withdrawals for at least three years.
- Pay stubs – for the last two or three months are typically requested, to confirm current earnings. It's also common to have to provide your latest pay stubs right before closing which has caused some closings to get cancelled due to layoffs.
Mortgage Application: Assets You Own
In addition to proving income to make monthly mortgage payments, the documents supporting your mortgage application must show where your down payment and closing costs are coming from. While the focus will be on your checking account, you will also need to document any large deposits and/or withdrawals to prove the money is yours and that it came from legal sources.
First let's look at the types of bank statements you may have to provide, along with other assets.
- One/multiple checking accounts.
- Savings accounts.
- Special bank accounts – certificates of deposit, money market accounts, etc.
- Financial savings accounts – brokerage accounts, retirement accounts like a traditional or Roth IRA, annuities, etc.
- Other assets you own including cars, boats, vacation homes, rental property, etc.
Here are some of the non-employment transactions you'll have to document when they affect your cash flow. You'll also need to explain :
- Proceeds from the sale of a house (car, boat, motorcycle, etc). Here you'll need to provide supporting documentation from a real estate closing or bill of sale if your state doesn't document ownership with a title.
- Gifts from family members must be documented. And they may have to document where the gift money came from. Alternatively, you might be able to avoid this by transferring funds six months/more before you submit your mortgage application.
- Cash settlements from a divorce, lawsuit, insurance claim, etc.
- Lump sum distributions (versus monthly) from annuities or other accounts.
Mortgage Application: Other Debts You Have
One of the first things you'll do in the mortgage application process is give approval to pull your credit score. You might wonder then … why you have to document the same debt that's part of your credit report. This remains a mystery to me. Maybe they want to be sure you understand how much debt you have? Or they need an explanation about your debt. For example, how you're making money from rental property because the mortgage is on your credit report.
Lenders will also look at how balanced your debt is. They want to see a mix of unsecured (credit cards) and secured (cars and houses) loans. They also want to see debt with a long history of on time payments, something school loans can demonstrate. If you're not familiar with your credit score, sign up for Credit Karma (it's free) to see how they organize the debt on your report.
- Credit cards.
- Auto loans.
- School loans.
- Existing mortgages for vacation homes. You'll also need to provide documentation on property taxes and insurance, the same things that are typically paid through an escrow account.
- Mortgages for rental property – which is harder to deal with. Most lenders won't give you credit for rental income until you've been a landlord for two years. That means if you can't show rental income on your tax returns, you'll meed enough other income to cover the mortgage.
Documentation on the House You're Buying
Last and most important, the mortgage application requires you to provide documentation about the house you're buying. For existing homes, you need to provide the purchase and sale agreement. When building a house, lenders will ask for your purchase contract plus change orders.
As I'm building a house, it was strange that the lenders asked for my homeowner insurance policy? They accepted a quote although even that was premature because we're at least 60 days before closing. Lenders do have requirements for how their interest in the mortgaged property is protected, which makes sense. What I've never heard of is a list of insurance companies lenders might not accept?
- Existing homes – will have a standard (varies by state) real estate purchase and sale agreement. More documents may be required like homeowner association documents as the lender will want to understand what your HOA fees are.
- New construction – when you decide to build a house, involves lots of documents. The ones lenders typically want to support your mortgage application are the signed contract and any change orders. As my builder stated up front that they'll add $500 on top of costs for any change order, I am waiting to make the changes after closing as they'll cost less.