WHAT YOU NEED TO KNOW ABOUT MORTGAGE DOCUMENTATION REQUIREMENTS
It wasn’t that long ago that mortgages could be made on little more than a wink and a handshake. Lenders took customers at their word that they were employed and made X dollars a year with no verification.
Those standards allowed almost anyone off the street to get a loan, so long as they had a decent credit score. Predatory lenders took advantage of the lax underwriting standards and made irresponsible loans, which then led to the Great Recession of 2008.
The 2010 Dodd-Frank Wall Street Reform & Consumer Protection Act passed bringing major reform to the Mortgage and Lending industries. The Ability to Repay Rule, which went into effect in January of 2014, overhauled the guidelines that define what a qualifying mortgage is It further prevents predatory lenders from taking advantage of borrowers and making loans that are likely never to be paid back.
But if you’re applying for a mortgage, it means you’ll be asked to provide much more documentation than ever before.
WHAT DOCUMENTS DO YOU NEED TO APPLY FOR A MORTGAGE?
Every borrower is unique with a distinct financial and personal history, which means the specific documents to validate that history will vary from person to person. No blood draws or offers of your first-born child are required, but be prepared to provide documentation of the information provided on your application.
Here’s a simplified checklist of documentation you’ll most likely need to provide when you finance your home with Perl:
WHAT PITFALLS ARE UNAVOIDABLE?
- 1. W-2 Forms: Two years (or more) of W-2 documentation is generally required.
- 2. Pay Stubs: One month of paystubs showing year to date income.
- 3. Bank Statements: Two months of bank statements – all accounts, all pages.
- 4. Tax Returns: Most borrowers will be asked for at least the latest year's tax return, all schedules included. If you're self-employed, have a side business, own rental property, or have a lot of employee business expenses, you'll probably need at least two years of tax returns, both business and personal.
- 5. Identification: Current driver’s license, state ID card, or your passport.
- 6. Source of Funds: If there are large or unusual deposits to your account, you’ll need to verify the source of the money. For example, if you sold stock you’ll have to provide copies of all the documents that verify the sale. And don’t be surprised if you have to write a letter explaining that the deposit in your account for $500 at Christmastime was a gift from grandma.
- 7. Gift Letters: If someone gave you money to help you purchase the home, it must be documented. Your lender will provide a form to document the date and amount of the gift, the purpose of the gift, and an explanation of the relationship between yourself and the person who was kind enough to give you the funds.
- 8. Proof of Reserves: You’ll need to prove that you can afford at least three months of mortgage payments.
THE GOOD NEWS:
- • Include every page of a multi-page document, even that “This page is intentionally left blank” page of your bank statements.
- • Keep your original documents and submit copies to your loan officer, but you’ll want to be sure the copies are legible after copying/scanning/faxing.
- • Do not open or apply for new lines of credit including purchasing a car or opening a credit card as this will affect your credit score. That shiny new Lexus can wait until after you close on your dream home. And, whatever you do, don’t go buying furniture for the new place on credit until after you close.
It’s easier to qualify for a mortgage now than it was after the 2008 Recession. Back then, in order to right the tipping infrastructure, banks and lenders reacted to the higher rate of delinquencies and foreclosures by narrowing the qualifications for obtaining a mortgage.
Those restrictions are still in place, but common-sense is starting to take root in lending. Qualification restrictions are loosening, making it easier to obtain financing while ensuring that loans are being made to those with the ability to pay them back. Bottom line? You don’t have to be a perfect borrower anymore, if a perfect application can be presented.