8. Documents

Key Documents Homebuyers Must Prepare for their Mortgage Loan and Home Purchase

 

When you complete the mortgage loan application, the lender will request supporting information and documents in order to provide a mortgage loan approval.

The documents borrowers normally must prepare are usually sorted into six categories:

  • Core requirements
  • Income documentation
  • Credit documentation
  • Asset documentation
  • Property documentation
  • Miscellaneous Documents

Core Requirements

Although additional documents may be needed (and reviewed below), based on your specific situation, the following documents and information are core requirements that you need to prepare:

  1. Copies of three most recent pay stubs. These pay stubs should indicate year-to-date (YTD) income, as well as provide documentation of your current employment.  Note: handwritten or manually prepared stubs may incur additional scrutiny as they are open to fraudulent manipulation.
  2. Copies of three most recent bank statements. You will need to document the source and existence of sufficient funds for the closing, down payment and reserve requirements.  Your bank account statement is sufficient to meet these requirements, if the statements indicate the average and current balance.  Note the funds must be currently in the account and must be “seasoned” at least two months to show that the funds actually belong to you (and were not borrowed).
  3. Copies of full tax returns and W-2s for the past two years. Your employment history must be tracked and documented for at least the two most recent years.  For most applicants, the W-2 form is sufficient to do this.  Tax returns are only required for more complicated income situations, such as rental, self-employment and secondary income.
  4. Landlord’s name, mailing address and phone number. The lender will send a verification request to your landlord or property manager, so as to analyze your housing payment history.  If you are worried about possible repercussions with your landlord, the lender can delay verification or you can provide copies of canceled rental payment checks.
  5. Letter of explanation for any negative credit issues. If there are any serious credit delinquencies or adverse entries on your credit report, you must provide a detailed letter of explanation.  Negative entries do not produce automatic rejection and can often be overlooked if sufficient explanation is provided.

Please note that with few exceptions, lenders only want copies.  Originals may become lost in the shuffle or permanently archived with the official file.  So it is best to keep your originals at home and only provide copies to the lender.

Income Documentation

In addition to the core documents listed above, there are other income-related documentation requirements that may be required to confirm that you have sufficient income to qualify for the mortgage loan:

  • IRS form 1099. If you work on commission or receive dividend income, you may have to provide a copy of your 1099 forms to document income during the past two years.  However, complete tax returns will usually suffice.
  • Rental/Lease agreements. If you are receiving income from rental property units, copies of the lease or rental agreements are required to document such income.  With refinances, rental income should also be supported with appropriate tax return schedules.
  • Social security award letter. Individuals receiving social security benefits are given an award letter at the beginning of each year, summarizing the scheduled benefits.  If you receive social security, this is used to document how much you can count toward income.
  • Pension notice. Similar to the social security award letter, the pension notice will usually provide a confirmation of the applicant’s pension income and duration.
  • Profit & loss statement. Self-employed applicants must provide a year-to-date profit-and-loss (P & L) statement to support their loan qualification.
  • Personal financial statement. Self-employed borrowers are sometimes required to provide a personal financial statement when mortgaging commercial or investment properties.
  • Proof of Self-Employment. If you are self-employed, you will be required to provide proof of self-employment for at least 3-5 years (different programs vary).  These may include business licenses, professional certificates, business bank account statements, client references, advertisement copy, yellow page listing, business cards, invoices, etc.
  • Divorce decrees and other related documents. If you are receiving income from alimony, child support or separation maintenance, copies of divorce decrees, child support agreements and alimony settlements may be needed for documentation.

Credit Documentation

Most credit-related documentation requirements relate to either credit history or current liability level.

Your total long-term liabilities will restrict the maximum mortgage loan amount for which you may qualify.  For underwriting and income qualification purposes, only long-term liabilities are considered against the borrower.  Long-term liabilities are any debts that will require at least 10 months to pay off.

Your credit history, on the other hand, will affect your credit grade, which determines loan program qualification.  Most documentation request regarding this issue are concerned with repairing or explaining the credit history.

Unlike assets, all liabilities must be disclosed.  The most common credit-related borrower documents requested by the lender include the following:

  • Letter of explanation for adverse credit. If you have any adverse credit entries listed on the credit report, especially during the past three to five years, an explanation letter must be provided.
  • Letter of explanation for inquiries. The credit report will list the name of all creditors who have pulled your credit report during the past 90-180 days.  The lender will require explanation for any inquiries, as it is concerned about the possibility of increased liabilities.  If you borrow more money, then the debt-to-income (DTI) calculations must be adjusted accordingly.
  • Divorce decrees and related documents. If you are responsible for paying alimony, child support or separation maintenance, you may need to provide copies of divorce decrees, child support agreements and alimony settlements.
  • Discharge of bankruptcy, judgments or liens. If you have had a previous bankruptcy, a copy of the bankruptcy filing and dismissal papers are normally required to document creditors settled.  Likewise, copies of judgment and lien discharge papers may be required to clear such adverse entries in the credit report.
  • Billing statements. These are normally only required when you’re paying off these accounts with a refinance or equity loan, or if you wish to provide updated balance and monthly payment information.
  • Canceled checks. Lenders will often require copies (front & back) of canceled checks to adequately confirm payments or update credit-payment history.  If you cosigned on an account, those canceled checks can remove certain credit entries — by showing that you weren’t responsible for payments on that co-signed account.
  • Receipts. Verified copies of receipts are sometimes required to correct credit items and document payments to payables.
  • Promissory notes. If you have other liabilities that are not fully reported on the credit report, copies of the promissory note may be required to calculate current payments and balances.

Asset Documentation

With regards to asset disclosures, the rule to remember is that you do NOT need to reveal all assets — just enough to qualify.

Essentially, you must show sufficient liquid assets or closing credits to satisfy all down payment, closing cost, prepaid expense and reserve requirements.

Closing credits are items such as gifts, seller subsidies toward closing costs or lender subsidies that are credited to the borrower’s behalf at the time of closing.  In addition, most assets must be “seasoned” to show that they are the applicant’s own funds — and not borrowed money.

The most common asset-related borrower documents requested by the lender include the following:

  • Securities statements. If you must disclose assets in securities, bonds or other investments in order to qualify for the loan, copies of the most recent securities statements must be provided.
  • Bill of Sale. If you are depending on the sale of personal property (such as a car, artwork, baseball cards, etc.) to qualify for a loan, a copy of the bill of sale is required.
  • Previous HUD-1 Settlement Statements. Similar to the preceding bill of sale, the HUD-1 settlement statement documents the sale of real estate property.  If you are using the proceeds from the sale of one real property in order to purchase another real property, then the HUD-1 will document the available proceeds.
  • Paper trail & source. You must prove that the funds used for the closing are legitimately available to you.  When seasoning is not readily apparent, a paper trail must be documented to confirm the source of your funds.  The paper trail may be as simple as a copy of a pay stub and deposit slip, or it may require documenting transfer of funds from the sale of certain stocks.
  • Canceled checks. Lenders will often require copies (front & back) of canceled checks to adequately confirm payments of earnest money deposits and other payables.  Canceled checks also are necessary to remove credit items from the credit report by showing that you were not responsible for payments on a co-signed account.

Property Documentation

The subject property is the security for the loan and must meet certain guidelines, depending on the specific loan program.  The lender will normally be responsible for obtaining many of the property-related documents, but the process can be sped up if you can provide these documents in advance:

  • Purchase contract. Copies of the signed sales contract, along with all addenda, riders and disclosures, are required for purchase mortgage loan applications.
  • Hazard insurance certificate. With refinances, you only need to bring a copy of the certificate page of the homeowners insurance policy. The lender will contact the insurance agent to update.  With purchases, you should instruct the selected agent to contact the lender to coordinate the exchange of necessary information.
  • Property tax bill. The county’s real estate tax bill indicates tax assessments on the property.  With refinances, you should prepare a copy of the tax bill.
  • Old appraisal, survey and title warranty. With refinances, you should prepare copies of the previous appraisal, survey and title warranty.  In some cases, the lender is able to obtain updates at discount prices from the companies that originally produced those items — and save you money.

Miscellaneous Documents

The following are miscellaneous documents that you may be required to provide to the mortgage lender:

  • Alien registration (green card). Non-U.S. citizens must provide proof of legal residency in the United States.  Copies of both the front and back of the green card or passport with visas are normally required.
  • Marriage certificate. With recently married couples, a marriage certificate may be handy in explaining and waiving recent increases in liabilities and savings.
  • Scholastic transcript. Applicants may sidestep the two-year employment requirement by showing that they were in school.
  • Military discharge papers. As with the scholastic transcript, applicants may waive the two-year employment requirement by showing that they were in military service.

Go to next HomeBuyer Guide chapter: “9. Preapprove Your Mortgage”

 

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