How to Satisfy a Lender's Needs

Mortgage and Lending with First Option Mortgage 269761

Along the way, the lender needs certain documents to bring the loan to closing. Here's a list of some of the documents I've encountered over the years and how to satisfy the lender's needs. Not all lenders will require these documents and/or their needs may need to be met differently. 

At the onset of a loan application, the Loan Officer (LO) requests certain documents from the buyer to close the loan: Last 30 days paycheck stubs; Last 3 months bank statements (all pages even if blank); Last 2 years W2’s; Last 2 years Federal Tax Returns (all pages and all schedules); Copy of Social Security card; Copy of state issued ID or passport; Copy of last quarterly retirement statement (if applicable).


Acronyms used: 

LOX – Letter of Explanation

LO – Loan Officer

LTV – Loan-To-Value


Appraisal – If repairs are required after completion of an appraisal, the lender will require the Appraiser to go to the property to inspect the repairs and state the repairs were completed satisfactorily. The time line of this requirement can occur days before closing and can push the closing out farther. The lender may also request additional comparable property if the underwriter does not feel that the properties listed on the appraisal are adequate to give the determined value.


Bankruptcy – Bankruptcy documents (all pages). LOX as to why the bankruptcy occurred and any documents that can support that (divorce decree, death certificate of major income earner etc.). Sometimes the bad debt on the credit report was not included in the bankruptcy. If that’s the case then the lender will need a LOX as to why the account was not included in the bankruptcy. If a mortgage loan was included in the bankruptcy, need proof that the loan was reinstated. For FHA, if the property was given back to the bank, need to find out when the bank was paid by FHA and show proof of that (the lender or title company can assist).  LOX as to why the property was given back to the bank.


Child Support – 12 months copies of the front and back of the processed checks or 12 months bank statements showing the exact amount being deposited each month with a copy of the court ordered child support payments matching that amount. Copy of the court ordered child support payments is requested in either case. If the child support payments are not court ordered, need a letter signed by the ex-spouse stating the intent to continue payments and the time frame expecting to pay the amount including the amount paid each month. Copy of divorce decree if applicable.


Condominium (Condo) questionnaire – Ordered by the lender to identify how many Condo units there are, the percentage of investor owned units, if the condo is completed etcetera and is requested from the Condominium’s Management Company. This process can take time if no one fills out the form correctly.


Credit – LOX for consistent bad credit payments. It’s okay to have problems paying bills on time. The lender wants to know why a buyer was recently late on a payment or why the buyer has a collection account, judgment, bankruptcy, etc.


Down payment assistance forms are usually ordered at the beginning of the loan process because of how slow the funding process moves.


Foreclosure – LOX as to why the foreclosure occurred.


Former Self-Employed – LOX that the company is no longer in existence if it reported a loss that hinders the buyer’s ability to obtain the loan. The buyer will need to dissolve the business and may require a letter from a CPA that the business was dissolved.


Inquiries – LOX for all inquiries reported on the credit report and whether or not money was borrowed from those companies for the purpose of getting the mortgage.


Large Deposits in bank account – LOX for the large deposit. If the money came from a piggy bank, then the LOX should explain how much money was saved each month to get to the amount deposited. It has to make sense. If $2000 was deposited and the person makes $1500 a month, then $50 a month savings over several years would make sense. If the deposit came from a relative, then a gift letter must be filled out and signed by that relative. If the relative makes a comment to the lender that he/she had to borrow the money, then the lender may request a copy of the gift giver’s bank statement to show the money was available at the time the gift was given. If the money was not available then the funds cannot be used.


Loans – LOX as to the reason for the loan {money borrowed for part of the down payment or for personal use).


Ongoing documents – Each paycheck stub that is issued to the buyer must be given to the lender. Each bank statement that is given to the buyer must be given to the lender. If the New Year comes into play, then the last pay stub of the year and/or the new W2 needs to be given to the lender. If the tax return was filed, that too must be given to the lender.


Relocation – LOX from the Employer stating that the buyer is allowed to work remotely from home and still be paid the same or better.


Second FHA Loan – A buyer can obtain a second FHA loan as long as:

The family grew in size and the buyer requires a larger home (the first home’s loan must be at 75% LTV). Proof can come from tax returns showing the increase in family size (dependents can be children or adults). If the buyer went through a divorce and is leaving the other FHA loan behind and the divorce decree shows proof of such. If the buyer was a non-occupying co-borrower on the loan and wants to buy a home of his/her own and can show proof using a utility bill or rental agreement showing he/she does not live there. If the buyer has to work in an area where affordable rental housing is not available (example: relocation – max LTV 85%) and can show proof that affordable rental housing is not available.


Self-Employed – LOX as to why the business income has dropped and what the company is doing to increase the income or profit. May require a letter from a CPA that the LLC or Corporation is in business if not found on the Secretary of State website.


Stay-at-home parent – LOX stating the buyer was a stay-at-home parent and why he/she is entering the workplace environment (children are self-sufficient, children graduated etc.).


Tax Return – If the buyer is self-employed and the income 2 years ago is larger than the income from 1 year ago, the lender will request the tax return from 3 years ago. Hopefully, the income from 3 years ago was less than the income from 2 years ago, otherwise it looks like the business income is gradually declining. The lender does not want state tax returns.


Termite letter (if applicable) – Most states require a Termite bond from the seller stating the property is free of termite infestation.


Unemployment – LOX as to why the buyer was unemployed for longer than 6 months.


Verification of Employment (VOE) – This form is sent by the lender to the employer to be filled out and returned back to the lender. The document states the buyer’s income and broken down by regular, overtime, commission and bonus income. It will also ask the certainty of the buyer’s ability to continue working for the company. I’ve seen an employer state, “not likely to continue working”. It was a typo but it costs a few days of processing to get it fixed.