So you have talked it over with your significant other and have decided that this is the right time to start shopping for a new home. Well if you are like most folks, that probably goes along with the prospect of getting a mortgage. Times have certainly changed some over the past few years, and there are certain steps you can take to not only make your own life easier but to also make sure you have the best shot and getting the best mortgage terms that are available. After all, is'nt the whole point of buying today to be able to take advantage of the historically low prices and incredibly low interest rates?
Applying for a mortgage and closing on your new home does not have to be a stresfull process, if you prepare yourself properly. Not only that, but your Mortgage Lender will appreciate working with you if you are better prepared than the average borrower, which in turn could asbolutely lead you to paying lower fees and probably even lower rates.
There are some very crucial things that underwriting will be looking for on every mortgage application, regardless of how good your credit or financial picture may be. A Little preparation will go a long way to make sure you have a smooth transaction and get the best possible loan.
Start preparing for your application and pre-approval by gathering necassary documents and asking yourself some important questions.
Your Mortgage Lender will need the following:
1) Your Most Recent 2 years of Tax Returns (Make sure to have all pages and schedules available) If you are self employed, its a good idea to work with your CPA if you have one to prepare a Year To Date Profit and Loss Statement. Please note, and Self Employment income does require a minimum 2 year history on almost every loan and will in almost all cases be documented through tax returns. If you have a corporation, then also be prepared to supply the corporate tax returns as well. Same rule applies to your corporate returns, you will need every page of the tax return.
2) Your Most Recent 4 Pay stubs
3) Documentation of Fixed Income: If you are on a fixed income such as Social Security or perhaps a Pension, make sure to locate your Awards Letters. Award Letters are the letter that you received from you pension that spells out exactly what your monthly benefit will be. You may have gotten this years ago and perhaps no longer can find it, however please know it will be necessary for you lender to receive it so it's best to start requesting it from your Pension provider now rather than wait til later and have it hold up your transaction. In addition to the Award Letter, you also receive a 1099, you will need to have copies of that for the past 2 years. If it is Social Security income, remember the Social Security Administration sends you a new letter ever year outlining what your new benefit is, you will need the last 2 years of this as well.
4) Your Most Recent 2 Months Of Bank Statments (Make sure the statements are complete and include every single page) While it may seem trivial to supply all pages because there are always some "junk" pages with literally no relevant information omitting a page is a red flag to any underwriter that will stop the process and create unnecessary conditions and add more time to your transaction. You should also take some time to carefully look over your transactions.
Watch out for any unusual deposits, if your payroll for example is $1,000 per week, but there are deposits in your account that simply don't match up to your compensation be prepared to address that. Lenders are now required to document any un sourced funds, so unusual deposits will immediately get flagged and create conditions. If you deposited funds that are from the sale of an item, be prepared to show proof of the ownership of it along with proof of the check received etc. As a general rule, avoid making large cash deposits as these can often be difficult for a lender to source. Even small amounts like $300 dollars can cause an underwriter to request a borrower showing the source of those fund with written documentation. Note: Your simple letter explaining that you just had some cash will more than likely not be sufficient. As a general rule, lender look back to the most recent 60 days of activity so bear that in mind when assessing your transaction history and bank statements.
5) Divorces: If you happen to be one of the millions of people with a prior Divorce, please know that your lender will surely want a copy of the Divorce Decree or an equivalent Dissolution of Marriage. This will be the case, even if the Divorce was years back. The reason for this is that often times underwriter's see additional liabilities in these documents such as Alimony or Child Support or perhaps other financial obligation agreed to in the proceedings. If you can not locate it, now would be a great time to contact your Attorney or the Court and secure a copy for your records which you can in turn have available for your lender.
6) Bankruptcies: Having a Bankruptcy in your past does not necessarily mean that you can not get financing. In fact FHA says you may be eligible for Financing only 3 years from the date of the discharge, USDA says you might be eligible in as little as only 1 year provided certain other criteria is met. A Foreclosure inside of the bankruptcy can add additional time so be sure to review this with your lender. A knowledgeable Mortgage Professional will be able to guide you with regard to bankruptcies and financing.
If you do happen to have a Bankruptcy in your history, you should be prepared to supply your lender with a complete copy of the Bankruptcy petition along with a copy of the actual Bankruptcy Discharge order.
7) Other Assets, 401k, IRA Etc: Having other assets in retirement accounts is a wonderful thing, and sometimes borrowers are hesitant to provide this information however rest assured disclosing this information will only help you. You see, lenders often like to see additional reserves and although these assets may not be in the form of liquid and available cash they still count as reserves. Also, having these types of account can often count as compensating factors when assessing risk such as perhaps some prior blemishes on credit or possibly a higher than average debt ratio or spotty employment history. Bottom line, have the most recent quarterly statement available for these accounts and don't hesitate providing the information to your lender. It will only help you secure the best terms. Lenders don't look at these assets as a means of getting more money from borrowers but they do go along way to make an underwriter feel good about approving an other wise iffy loan and go even further to get you the best terms and rates.
Other items or areas that you should pay close attention to are probably things that you generally would not think of. For example, pay attention to the name on your pay stubs vs the name on your W2's. Does that match? If not why? Be prepared to provide written explanation of these types of discrepancies, as they are red flags to an underwriter that a possible prior divorce may exist and therefore possibly additional liability. Also, do you share your bank account with a significant other or relative who may not be on your application? If so, you will need to also provide written explanation letters on this as well. In addition your lender will probably want something in writing from that individual stating it is OK for you to use the funds in that account for the purposes of buying the home and that the funds being used are not borrowed funds from that individual. In other words, an underwriter will want to know the money is your own and that the other person on the account is not expecting you to have to pay it back. Remember underwriters are looking for undisclosed liabilities, and paying back your aunt Sally regardless of how you look at it is indeed a new liability and additional debt.
Following these simple tips and steps will make you a better informed borrower and consumer, it will also make your loan more attractive to an underwiter. In fact picture if you will an underwriter with 50 files to review, 40 of which might incomplete or missing information and your happens to be chock full of all the items and underwiter needs to look over it once and issue an approval. Which one do you think will get the most immediate attention? Yup, you guessed it, that would be yours.
If you have any questions regarding the home buying process or the Mortgage process, feel free to give us a call anytime. I will be more than happy to help answer and demystify any of your Real Estate related questions and provide you with good accurate information.