9 Most Important Do’s and Dont’s After Applying for a Mortgage
Do tell everyone that you know that you are buying a home. Those people will have their stories to tell. They will tell you of the things they felt they wish they knew more about. They will tell you the things they feel went wrong in their search to buy their home. Take in all of these concerns and discuss them with your lender.
- Do keep copies of the most recent documentation that your lender has asked you to provide. When your next bank statement comes to you, make a copy for your lender. When you get updated paystubs, make a copy of those for your lender. This prevents you trying to find the documentation while you are preparing for a move and have packed everything away.
- Do be patient. In this age of documentation, lenders will likely ask you for things that you can expect them to ask for and they may very well ask you for items that you think are intrusive or down right stupid. Maintain your temper and provide the document in a timely fashion.
- Do ask questions. When an underwriter wants a document there is always a reason. We may not agree or understand the reason, but they are trying to document something. Ask your lender what the logic is. If the loan officer can’t get you an adequate answer, then they likely are not the quality lender that you deserve.
- Do respond to every request for documentation in a timely fashion. In most cases, if you are prepared for what the lender might want, you can provide it within a 24 hour period. Every day that you delay providing documentation is another day you risk not getting your loan done in time to complete the transaction.
- Do make sure that your lender knows who all of your professionals are in the transaction. You will need to select your realtor, your real estate attorney and your insurance agent.
- Do pay your 12 month insurance policy at least 2-3 days prior to closing and provide the policy and paid receipt to your lender. All loans require a 12 month paid insurance policy prior to closing. And do not allow your lender to convince you that it is ok to pay for your policy on a monthly basis. Some insurance companies do this because they collect a processing fee (added profit) each time you pay monthly. You must pay the policy in full prior to closing. After that, you can pay monthly if you’d like to.
- Do let your lender know if you and the seller have agreed to any concessions to the loan such as after the home inspection. If you have negotiated a $500 credit, be sure to tell your loan officer about that credit. One rule of thumb in lending is to never surprise your lender at the closing table. Often times, it will not be a problem, but don’t tempt fate. It isn’t worth it.
- Do plan on brining your spouse to closing. Even if you spouse is not on the loan, he or she will be required to sign a few documents. Once such document is the Homestead Waiver. This is the document that basically points out that you understand your spouse is buying a home for which you are not on the loan. That you cannot assert your rights to the property if he or she does not make the payments.
- Do not get 100% of your advice from your parents. Your parents have your best interest in hand, but the lending process has changed quite a bit since the days your parents got loans. The process has even changed quite a bit since 2006-2007 prior to the collapse of the industry. I have heard discussions from very smart people that say you cannot buy a home if you do not have a 20% down payment. That has not been the case since I got into the business in 1999. I also heard a conversation between a mom and daughter in which mom said she would never get a loan because her husband had changed jobs 2 times in the past 5 years. That simply isn’t true.
- Do not pay off collections until your lender instructs you to do so. It is not fair, but the fact is when you pay off a collection, it is treated in your credit score calculations as if it is a brand new collection. If your scores are close to any of the limits of the loan, you risk getting charged more in fees for the lower score or worse, you risk being rejected for the loan. Of ten times, lenders will simply make the collections be paid at the closing table. While that can be painful, it is better than being rejected.
- Do not deposit CASH into your account. Many consumers find this to be lacking in common sense. But here is the issue. The lender must “source” all deposits into your account. Lenders wont’ waste their time on $20.00 deposits, but most banks decide that a deposit of $500 or multiple deposits equaling $500 over several months will trigger an underwriter to question the source of the deposit. If you can “source” the deposit, it will not be counted as an asset. If you have cash around the house, deposit it into your account at least 2 months PRIOR to the lending process beginning. Any money in your account for at least 2 bank cycles is considered your money.
- Do not make any purchases. In some cases, you may have enough flexibility with your debt to income ratio that it isn’t a big deal. But if your ratios are close and you make more purchases, you may be denied. Even if you are not denied, your loan may have to go back to underwriting for another review delaying your purchase. Here is the bottom line. Any purchase you need to make can almost certainly be delayed until after the closing. One of the changes that occurred from the regulatory reform is that almost all loans go through a quick credit check review 1-2 days prior to closing. Any discrepancies will be uncovered. In some cases, even the over use of a credit card can be cause for an underwriter to review the file one day prior to closing.
- Don’t co-sign for debt. Most consumers think co-signing for a friend or family member doesn’t affect you. The bank will hold that liability against you in full. So if you co-sign for an auto loan that is $500 per month for the next 5 years, you are on the hook for that debt for the next 5 years.
- Do not close or change bank accounts. This type of activity will only cause you to document more and more information. If you hate your bank, my advice is to wait until after the closing and shut down the bank account immediately. If you really need to start a new account, open the new account and transfer the money from one account to the new account thus creating a paper trail. Leave both accounts open until after the closing then terminate whichever account you wish to close.
- Do not quit your job. I understand that a new job prospect may look tempting, but it can also be tempting for an underwriter to want to review your file. And if this new job or your old job involved bonus income overtime income or commission income to qualify for the job, that income will likely be not included on the new job. You can accept the job and just not start the new job until after the closing.
- Do not close any credit accounts. One of the misconceptions about credit scores is that closing accounts will always improve your credit score. In fact there are times when closing accounts will actually result in lower credit scores. This is not the time to be closing accounts and run the risk of your credit score going lower.
- Do not go on vacation or leave town without having access to or have someone who has access to any of your documentation. We will see from time to time a contract is accepted and the person leaves town the next day. When the documentation is returned to your lender, questions will come up. You need to be available to answer those questions and provide documentation to support those answers.
The old days we will define as prior to 2007. Of course, in the old days anyone that had pretty good credit (700 FICO score), we didn’t have to document as much of your income or assets. We may have been required to show one pay-stub and one bank statement. Rarely did a borrower with a 700 credit score have to show tax returns. As a result, there was an entire group of mortgage people (I’ll call them “app takers”). that emerged. They knew very little about the mortgage industry. They knew very little about what documents were needed and why a bank would want the documentation. I recall a funny story from the days when I first got into the business in 1999. The person who trained me was a good friend. He taught me so much about how to take a great loan application. This is the story he told me to use. He said he was at a closing and someone asked “What is this document and why does it need to be signed?” He said he told them with a straight face, “I don’t know. Let me go outside and make a call and see.” He told me he went outside, he merely smoked a cigarette and came back to the closing. He looked them straight in the face and said, “The bank isn’t sure what the document is for, but if it doesn’t get signed, the loan can’t close.” That is the mentality I try to avoid if at all possible. So stay away from the “app takers” and find a true mortgage professional to assist you.
WHAT DOCUMENTATION IS REQUIRED:
- Proof of Identity: The acceptable documents are Drivers License or Passport.
- Proof of Income: Regular income must be supported by the most recent 30 days of pay-stubs. Bonus income must be documented for the past 2 years. Commissioned or 2nd job income must be supported with the last 2 years worth of income.
- W2’s: Must be supported by the last 2 years of W2’s.
- Federal Income Tax: The last 2 years of Federal Income Taxes. State taxes are not needed.
- Assets: All Bank Statements needed to support the transaction costs. The documents must be the most recent 60 days of bank statements.
- IRA/401k: Most recent 60 days of statements.
- Proof of Homeowners Insurance: Agents Name and Phone Number along with the DEC (short for Declarations) page.
- If a refinance, the most recent mortgage statement.
- If you have a HELOC (Home Equity Line of Credit), a copy of the note.
- IF an FHA Streamline refinance, a copy of the NOTE and HUD1 statement are required.
WHY EACH DOCUMENT IS NEEDED:
- Photo ID’s are required to ensure the person on the loan application is the person that is signing for the loan. This protects you and the bank.
- Income is needed to document that the person(s) buying the home has enough provable income to afford the property in question. If you are an paid hourly, we need to verify how many hours you work. Some jobs define full time as 35 hours per week. Some employers define full time as 32 hours per week. Without knowing that information, your income might be overstated and later rejected by the underwriter. Bonus/OT/Commission income must be averaged over the last 2 years. However, if the most recent year shows a significant decline in income, the underwriter will likely only include the lower number in the calculations. 2nd jobs are unique. We need to document that you have had the job for at least 2 years then we average the income just as we do for the OT/Bonus/Commission income.
- W2’s. These are usually only used to demonstrate total income in OT/Bonus/Commissioned employees.
- Federal Tax Returns are used to verify a few key issues. The underwriter will look to see if there are any work related deductions that have taken away from your income such as meals, or business expenses. The underwriter also looks to see if you have a business that has lost money. That factors into your overall capability to pay the loan.
- Assets: The obvious point is to verify that you have enough assets to complete the transaction at hand. The key is whether the assets are provable. We look at your bank statements for things such as large deposits (over $500). Any undocumented deposits will not be included in the total assets. We also look to see if the borrower has bounced checks. That is a HUGE red flag. The underwriters will also look for any re-occuring debts each month that might indicate a debt that you failed to disclose to us such as you co-signing for someone or child support.
- IRA/401k: Used for reserves. The bank verifies the dollar amount and deducts any loans listed against the dollar amount. We only use the VESTED interest in the 401k.
- Insurance: The bank needs to be listed on the policy so that the loan gets paid off first in case the house burns down.
- Mortgage Statement. We really only use this to verify where to call to order a payoff in a refinance transaction.
- HELOC (Home Equity Line of Credit): This is a critical document. If you have a HELOC on your property, the new lender you are applying with will not approve your loan unless the HELOC lender agrees to “subordinate”. In very simply terms, that means the 2nd lien holder agrees to stay in the 2nd lien position. Without it, the new loan company will not agree to create a new loan. We need to verify that there is at least 5 years left on the remaining loan. If not, the bank will not approve the mortgage. They do not want to get into a new loan only to have your HELOC expire 3 months later and you cannot find a lender to provide you with another $100,000 HELOC. That would be bad!!
WHAT DOES THE BANK LOOK FOR?:
- Photo ID not expired and correct current home address.
- Paystubs: We need to verify that the income reported matches the paystub. We look at all deductions to see is there are any wage garnishments or child support coming directly out of check along with any 401k loans. We only look at your GROSS income. We do not look at take home pay.
- W2’s: We are just looking at total income if we need to average bonus/ot/commission income.
- Federal Taxes: We have to receive everything you send to the IRS, not simply the first page. Any attachments or Schedules, must be included. We look for such things as business expenses that you deducted from your income. We look for any undisclosed businesses. We also look for rental property. You cannot tell the bank your rntal property income is $1000 per month if you reported your income to the IRS as $800 per month. The tax form is the final say. However, we do add back to your income depreciation expense. So if you don’t report income to the IRS, you can’t report it to the bank.
- Assets: We look at all deposits to verify we can “source” the deposit. We need to verify it came from a reliable source. If we can’t verify it, we do not allow that asset to be counted. The bank needs to be sure you did not take out a loan for the down payment. That is always a no-no. It could potentially put the bank at huge risk. We also look to verify you did not bounce checks, another huge red flag. We also look for any repeating bills. We are looking for any debts you failed to disclose to us. You must include ALL pages of the bank statement even if they are blank. So if page 1 of your bank statement says Page 1 of 5, you must show all 5 pages. They want to verify that on page 4 the bank statement there isn’t a loan you have with that bank.
- IRA/401k: Just looking for the total assets.
- Insurance: We ensure the bank is listed the bank as a debtor in the form of what’s called a “Mortgagee Clause”. The banks also wants to verify that you have enough insurance coverage to pay off the loan if a total loss is incurred.
- Mortgage Statement: We only care to have the phone number to get your payoff in a refinance.
- HELOC: Must have at 5 years remaining on the loan. We do not want you having to scramble to get a new loan to pay off the old loan because it will expire 3 months after the closing.
So, here is the rule of thumb:
In the old days (2007) documentation was used to bolster a file so an underwriter felt better about approving a loan. Today, documentation is needed to uncover any POTENTIAL issues down the road that we should have forseen to ensure the end lender will not think we tried to commit loan fraud.
Be prepared. Collect and keep all of the documentation I have discussed and you should be pretty good. Find a mortgage professional that will ask you the appropriate questions up front so you aren’t dealing with them throughout the process of getting your new loan.