You may have heard stories about changes in the mortgage industry in the years since the financial crisis and the difficulty in obtaining a mortgage for your home purchase. The common perception is that it is “very difficult” to get a mortgage today. Contrary to this popular belief, getting a mortgage is not the nightmare you may think…it’s really not that hard!
Although standards aren’t ridiculously loose as they were prior to the financial crisis, lenders have eased many of the tough requirements and it’s becoming a whole lot easier for buyers to get mortgage-approved.
With stable income, some down payment money, and a decent credit score, borrowers are able to obtain a mortgage for a home purchase or refinance. There is more scrutiny that goes into the processing and underwriting of a mortgage and borrowers have to provide more documentation and sometimes jump through more hoops than before. While this can be a hassle, it usually doesn’t prevent a borrower from qualifying for a mortgage.
Knowing what to expect can be helpful. Lenders routinely request a standard set of documentation from borrowers. Below is a list of the documents that are needed on most loans as well as a brief explanation of what the underwriter looks for within each category.
Yes, you do need income to obtain a mortgage loan. If you are a wage-earner, meaning you have an employer and receive a W2, you will need to provide the most recent pay check stubs covering the past 30 day period. The pay stub must show the name of the employer as well as your name along with the earnings for the pay period. Each pay check stub should show a year to date amount for both earnings and tax deductions.
You will be asked to provide you W-2’s, 1099’s and tax returns for the previous 2 years. When providing tax returns, all schedules and pages are required. The tax returns are validated with the IRS and must match. Any discrepancy must be addressed immediately.
If you are self-employed, your tax returns will be used as the basis for proving income. Schedule C, 2106 expenses, and Schedule E gains/losses will be used in calculating your income.
Certain things on a tax return affect the calculation of qualifying income. For example, in some cases unreimbursed business expenses must be deducted from income and depreciation can be added back to income.
Self-employed borrowers are also required to provide business tax returns for 2 years as well as any K-1’s associated with the business.
Rental income (or loss) is calculated based on what is reported on the tax returns. Depreciation can be added back however all those expenses you write off will affect the amount of rental income or the loss that is used in your income calculations for mortgage qualifying.
If you are relying on social security income for qualifying, the lender will require a copy of the awards letter which describes the benefits for the current tax year as well as the 1099’w for the past 2 years if applicable. The Social Security Awards Letter confirms the type of the benefit, the likelihood of continuance, and if the income is taxable.
Assets accounts such as checking, savings, investment accounts, and retirement accounts must be documented with account statements for the full 2 months preceding loan application. You must furnish all pages, even if they are blank. The statements can be printed from your online banking access, however they must be statements, not print screens and not transaction histories. Each statement must show the name of the depository, your name, and your account number. If you are unable to access online statements and go to the bank to pick up a copy, the copy must be authenticated with a bank stamp. The bank will know exactly what to do, just be sure to ask them to apply the bank stamp.
Any deposits in your asset accounts that are not payroll deposits must be documented. This is a common hurdle for homebuyers. A copy of the item deposited along with an explanation will be requested. This may seem a bit invasive however the lender must ensure you are not relying solely on gifts or borrowed money to qualify for your home loan. (Don’t worry, there is a provision for using gift funds).
Cash deposits should be kept to a minimum as they are extremely difficult to source and could become a thorn in your side.
If you happen to move money between accounts, you must document the source. Therefore be prepared to provide the statements for any accounts that may be involved. You will be required to provide all pages of the statement where the funds originated. It is wise to avoid moving money back and forth between accounts once you begin looking for a home, unless you enjoy added paperwork.
Earnest money and option money must be verified, sourced, and seasoned. A copy of the cancelled check and the statement of account will be requested for the earnest money and option fee. The funds must be seasoned, meaning they must be from your own funds and have been in your account for the past 60 days. If the money is from funds you recently transferred from an investment, 401K, received a bonus, etc. you will be expected to provide documentation of the source of those funds. If the source is a retirement fund, you’ll be asked to provide the Terms of Withdrawal. Earnest money that cannot be sourced cannot be credited to you.
Many loans require “reserves”. These are funds that are not used for your down payment or closing costs, but funds left over that can be used in the event of an unexpected financial crisis. You will not be asked to liquidate the funds but you must prove the ability to liquidate the funds if needed.
If you are divorced, lenders require a copy of your divorce decree, signed by all parties including the judge. If you pay alimony or child support, these details will be included in your liabilities on your loan applications. If you are relying on alimony or child support to income-qualify, the figures outlined in the divorce decree will be used provided the support will continue for at least 3 years. If you are newly divorced and relying on alimony and/or child support income, you must have received it for 6 months and it must be documented via cancelled checks.
Many potential borrowers often don’t apply for a home purchase or refinance because they think they must have near-perfect credit to get a mortgage and fear having their application declined.
It’s true, the best mortgage rates go to those with credit scores of 740 or higher, however borrowers can qualify with lower scores. Borrowers can usually get a conventional mortgage with credit score of 640 while borrowers with scores in the low 600’s can usually qualify for FHA loans.
With both conventional and FHA financing, down payment options vary depending on the credit score.
The bottom line is there are more hoops to jump through, but the good news is you don’t have to have perfect credit and 20% down payment to get into a home today.