Mortgage Documentation: There’s No Easy Way Around It
Let’s start by stating the obvious, applying for a mortgage is no easy process. Both lenders and investors (the buyer of your mortgage after the lender has closed it) require mountains of paperwork ensuring your income, assets, and liabilities are all accounted for and have been verified. There’s no easy way around these stipulations as they are absolutely needed to underwrite your mortgage loan request and ultimately get you approved for your dream home. Even the most stellar of borrowers can run into issues getting approved due to various underwriting guidelines, documentation requirements, and even the timing of when you may have filed your tax returns/extension. In the end, it comes down to essentially one thing… documentation.
You are going to have to document your income via providing paycheck stubs and W-2s. Lenders usually require a borrower (or borrowers) to bring in the last two most recent paycheck stubs. This allows them to verify current income and expected continuation of at least that much income. In addition, mortgage loan guidelines also demand the prior two years W-2s and tax returns be available for review, including all pages and all schedules. In other words, the whole thing. And that’s not the end of the IRS documentation. You’ll also be asked to sign the IRS form 4506-T, which allows us, as the lender, to actually obtain a transcript of the very same tax returns you’ve provided to us. This is all done out of necessity to ensure all banks, lenders, investors, etc. are sufficiently protected against fraud. All of this is done to substantiate prior years’ income levels.
You’re also going to need to document how much liquidity or “cash on hand” you have or have accumulated. You’ll need to provide documentation of bank statements such as checking and savings accounts, investment accounts, etc. for a minimum of the past 30 days. If you’re applying for a larger mortgage loan like a jumbo loan, or loan greater than $417,000 in Texas, you’ll likely have to provide all of the above documentation for the prior three months.
Applying for a loan as a “W-2 employee” versus a “self-employed” borrower is actually a little easier. Self-employed borrowers are going to have to provide almost all the same documents discussed above, such as tax returns, bank statements, etc., in addition to submitting a year-to-date Profit and Loss statement. Here’s why it’s considered “easier” for W-2 borrowers than self-employed borrowers to apply for a mortgage in today’s environment: When the housing boom was in full swing in the mid-2000’s, many of these borrowers who were self employed were able to get loans with virtually little to no income documentation required…at all. This created real problems within the industry; thus, there are no longer such things as “stated income, low doc, etc.” loans. They have gone the way of the dinosaur…and the industry and homeowners are both better off for it.
Everyone loves some help, and most commonly, this comes in the form of a “gift” for the down payment from a parent or relative. If you get such help, you’re going to need to prove that it’s truly a gift and not a loan. Borrowers who receive a cash gift for their down payment should be prepared to have a letter readily available from the giver that declares the gift is not a loan. In many cases, the lender will have a template of sorts to provide for assistance. In addition, the giver of the gift will likely need to provide a copy of their bank statement showing the source of the funds, a canceled check transferring the funds to the beneficiary (the borrower), and the borrower’s own statement showing the funds in their account may be required.
It’s no secret that these documentation requirements are quite a bit more stringent than they used to be, but they are all to ensure the downturn experienced in the mortgage industry in the mid-2000s isn’t repeated. But keep in mind, while all of the above may seem like a pretty extensive list, it’s not all encompassing. There could be some other required documents dependent on each borrower’s own circumstance and scenario: renters may be required to provide canceled rent checks and bank statements showing the rent was paid on time; copies of divorce decrees; proof of a child’s age if child support is counted as income; bankruptcy discharge papers and more.
So knowing all of this documentation is likely going to be required when you apply for a mortgage, what’s one to do? Well, here are some very brief tips:
- Bring in documents to your lender as early as possible as it could speed up the process (which is not fast by design).
- Never, ever, ever modify information on a document being required or provided. Doing so makes it 100% invalid for the lender and the investor.
- Provide every page of every document.
In summary, be prepared to supply updated documents of any of those listed above and even those that weren’t listed as this is not provided to be an all-inclusive list. Most documents have an “expiration date”, if you will, of about 60 days in most cases. So if it’s taking a while to find that perfect home, be prepared to bring in some updated information…there’s just no easy way around it, you’re going to need a lot of paper proof to purchase a home.
Executive Vice President, Strategic Integration at Extraco Banks