A mortgage is often the largest loan that a consumer will apply for. In contrast to most other loans that a consumer will be granted in a lifetime, the documentation that must be provided in applying for a home loan can seem overwhelming. Mortgage companies scour every aspect of a buyer's finances and assess the risk to themselves before they approve a home loan.
The first piece of documentation is rather simple. The prospective home buyer is expected to fill out a complete mortgage application and provide her income and basic debt assessment to the mortgage company, to the best of her knowledge.
The buyer will also need to provide personal information such as Social Security numbers, identification (a driver's license is acceptable) and date of birth.
In the time between the completion of the application and the closing of the mortgage, the documentation requirements become more complex.
The first piece of the mortgage puzzle will be for the buyer to provide all stated income documents. This allows the bank to verify that the income stated on the application is correct.
The most common sources of required income documents are the previous 60 to 90 days of payroll history from the applicant's employer, the previous 60 to 90 days of bank statements verifying the deposit of the stated income, and the last two years of W-2 statements.
Debt and Credit
By completing a mortgage application, the buyer is authorising the mortgage company to pull his credit history. The mortgage company can choose to pull the credit history from one credit bureau or from all three credit bureaus. The mortgage company is looking for three things: the buyer's debt load, the available credit on current lines, and any adverse credit items.
The buyer is allowed to receive and review the credit report that the mortgage company has, and to dispute or explain any negative items in the report that could hinder his home loan approval.
The mortgage company will verify that the buyer is employed. This is normally accomplished by contacting the buyer's human resources department using the information that the buyer put on the application.
The mortgage company will verify not only the employment information, but the length of time on the job. If the buyer changed jobs within the last two years, a home loan approval can be jeopardised if she switched careers. However, if the buyer simply changed employers but remained in the same field, that will not be viewed as negatively, and a mortgage approval can still be obtained.
Not all loans are structured the same way. The additional documents required can vary from one type of loan to another.
For example, to be approved for a Department of Veterans Affairs mortgage, the applicant must provide proof of active duty or a DD-214 form that shows he was honourably discharged.
For self-employed buyers, the last two years of income tax returns will be required to validate income.
For a buyer who owns other property, the new mortgage lender will require the property information, rental agreements, total balance on the mortgage for that property, and an appraisal showing the current market valued.
Buyers with any adverse items on their credit report will be required to write a letter of explanation to the mortgage company. If their history shows late payments or old collection accounts (exceeding two years), the mortgage provider is looking for a valid reason. The most common would be death, divorce, unemployment or a severe medical problem.
Depending on the buyer's scenario, there is more information that a mortgage company can require for a home loan approval. Be prepared to offer up all financial information and documentation quickly for review and approval.