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.