If you have a new year’s resolution to buy a house in 2022, here are some things you can do to smooth the path to getting a mortgage. The paperwork does not have to be overwhelming, if you are prepared.
The mortgage broker, also called a loan originator, is responsible to the lender to prove that you are a worthy borrower. There are Federal guidelines that they need to follow. They are obligated to document what you earn and what you owe, so that they can show that you can afford to borrow the amount you are asking for.
As part of the planning, be prepared for the kinds of paperwork most lenders will ask for. You can make it easier on yourself, and the lender, if you begin to gather the documents on your own time, without a deadline looming.
These are the categories of information your lender will need:
- current or reasonably expected income or assets;
- current employment status;
- the monthly payment on the covered transaction;
- the monthly payment on any simultaneous loan;
- the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support;
- the monthly debt-to-income ratio or residual income; and (8) credit history [source]
Once the originator has everything, that file is reviewed again by an underwriter. The underwriter looks at all of your materials, plus the appraisal for the property before approving the loan. Anything that is confusing or awkward may trigger suspicion on the part of the underwriter.
If your paperwork is confusing, your mortgage might be rejected. Below are some ways to make it simpler.
Avoid – unless absolutely necessary
If you need to transfer $10,000 (for example), from a long-term savings vehicle to your checking account, this is how to do it:
Document the funds leaving and arriving at each account. This avoids unnecessary confusion. Underwriters don’t like confusion.
- Don’t make large (greater than $1,000) non-payroll deposits within 30 days of applying for financing. If you have large non-payroll deposits, do this: find out how your lender wants you to document them before you deposit the funds. Some lenders want a form from the source of the funds, some want a scan of the check, some want proof this check is not a loan.
- Don’t sell stocks or liquidate bonds. If you need to do this, find out how to document them before you begin.
- Don’t apply for loans or lines of credit, especially credit cards. Don’t buy furniture or any other big-ticket item on credit. This can affect your credit score. Changes in your credit score can cause your mortgage to fail at the last minute.
- Don’t make large (greater than $1,000) financial purchases or transactions unless you do this regularly. If you regularly have large amounts going in and out of your accounts, document the typical month, so that you can show the lender that this is normal.
- If you are getting a large cash gift or other type of down payment assistance, you need to document that this is not a loan. Before moving funds, check with your lender about what kind of proof they need. Some want a form from the bank of your donor, some want scans of the checks plus a letter from your donor stating that this is a gift/grant, not a loan.
These things help when you’re applying for a mortgage!
- Do save and gather 30 days most recent pay stubs and bank statements. (Some lenders want 90 days.)
- Do make sure you have your most recent two years of federal income tax returns and W2s available.
- Do pay your bills in a timely fashion, especially credit cards. Missing payments is a big ding to your credit score. Beware of store credit cards; they are easy to forget about and then miss a payment.
- Do keep your credit card balances below 10% of the maximum. Even better, avoid any balances, if possible.
- Do make copies of gift checks and obtain gift letters prior to depositing funds (if gifts are necessary.) The underwriter is responsible for checking that additional funds into your accounts are not loans (too much debt increases your risk of default.)
- Do be prepared for the underwriter to request detailed follow up documentation regarding past addresses, legal agreements, etc.