What and Why Lenders Need to Know So Much
Paperwork is a well known burden of the mortgage application and approval process. You may have wondered yourself why the lenders need to know so much about you. Perhaps even what they need to know about you. So here in this article we provide you with just that information. We identify a few of the most common requirements by lenders in regards to documentation. We then explain what this documentation is and why the lender requires it. By the end of this article you will have a better understanding of how lenders think and why they require the things they do during the mortgage process.
To begin, we start with the very basic information and documentation lenders require of borrowers, which include:
Pay Stubs & Income Tax Returns
What: Usually lenders require 30 days worth of this documentation combined with income tax returns for the past two years. The standard accepted type of documentation are pay stubs or direct deposit bank statements. However, there are certain lenders with more flexible options to accommodate self-employed borrowers. These types of borrowers are known to reflect lower income on paper despite their true income, due to annual deductions and business expenses. Some lenders accept 12 months of bank statements for these borrowers.
Why: Income is one of the most important factors of your mortgage application--the lender needs to know that the borrower makes a certain income in order to be able to afford the monthly payments. Without any income verification for a mortgage application, the lender has an increased risk of lending the money due to the higher possibility of foreclosure and inability to make payments. This is exactly why if the mortgage application requests no income verification, the resulting interest rate will be higher than normal.
What: Generally lenders require two months worth of asset documentation--whether that is from checking and savings accounts or retirement and stock funds. The standard accepted methods of documentation are: 1) bank statements from the most recent two, consecutive months, or 2) Verification of Deposit form completed by the bank themselves. The second form of verification is not up to you to provide; however, the bank account number and bank name is to be given by you to your mortgage consultant.
Why: Assets are important to a lender because of the fact that if your income were to suddenly cease or if you had a life emergency, you would have the savings to cover your monthly mortgage payments for at least a couple months. Without verifying this portion of a borrower's financial information, the lender runs the risk of having no payment backup if the borrower were to lose his or her job while owning the property.
What: Besides the social security number, the full legal name, and the birthday (all required information to order credit report on a borrower), this is not a piece of documentation that the borrower actually provides. The borrower's mortgage consultant will be the person to obtain the credit report and issue this document to the lenders. The credit report will reflect the borrower's credit history from all three bureaus: TransUnion, Experian, and EquiFax.
Why: Lenders put a huge emphasis on a borrower's credit report because the report shows the borrower's credit history, credit rating, and a snapshot of the borrower's current financial situation. All these things reflect on the borrower's level of financial responsibility. Low credit scores, derogatory credit history, late payments, bankruptcies, or collections all mean one thing to a lender: higher risk lending. High credit scores, timely payments, different credit types all mean one thing to a lender: lower risk lending. Lenders want to risk to low-risk borrowers because there is a higher assurance that the lender will get a good return on the investment; otherwise too many foreclosures or late payments can potentially put the lender out of business, as we have seen more and more of in recent months. Would you like to read more about what affects your credit or how to improve your credit score? Visit our credit section of our Library, there are many articles to help you get to where you want to be and also just to educate you on the effects of credit.
Here are some common and more specialized requirements that we see from lenders. These documents do not necessarily apply to every borrower especially taking into consideration what form of documentation the borrower decides to take. If you would like to learn more about the different types of documentation you can choose from, read our article: "Full Documentation, Stated Income--What Are They?", this depends on the borrower's situation and personal mortgage application. However, the mortgage consultant should be able to foresee the lender requiring any or all of the following documents:
CPA Letter or Business License
What: This condition is required of those who claim to be self-employed. In order to prove their employment status the lender requires the borrower to provide either a CPA letter or business license as verification. The CPA letter is essentially a letter written or typed by the borrower's personal or business CPA stating that he or she does the borrower's taxes and the borrower does enjoy income from the business stated on the mortgage application. If the borrower does not have the services of a CPA, a copy of the business license for the company is just as good. The business license will have to be valid and be valid still for at least three months in the future.
Why: Take a look at the entire mortgage application from the lender's perspective. The lender is essentially making a decision to lend hundreds of thousands of dollars to a borrower the lender does not know personally. In order to minimize the lender's risk when giving out these large sums of money, the lender needs an airtight, well-documented file on the borrower to make sure the borrower's information is correct and nothing is lacking. If the borrower states he or she is self-employed, the lender will want to see verification of this if just to make sure the employment status is true. Also, when a borrower states that he or she is self-employed, the lender runs the risk that if the company were to fail the borrower instantly loses all income, whereas if the borrower were working for a large company, there is less of a chance of sudden employment loss.
Gift Funds - Gift Letter, Gift Fund History
What: Gift funds can be much more complicated than you think. The gift letter is required from the individual doing the gifting; it will state the money is a gift, the amount of the gift, and that the money is not expected to be returned at any time. The lender sometimes will want to track the funds to make sure the gift is coming from the claimed source. The lender will and always will want to know the source for any fund going into a loan. So with this gift, the lender will want to see that the funds have been in the gifter's account for at least two months before allowing the gift at all.
Why: The lender wants to know that the funds are not coming from uncredible or outside sources that are unknown or harmful to the borrower. If the gifter is getting the money from a credit card or if the money was given to the gifter to give to the borrower, all these things raise red flags for the lender. The lender wants to see straightforward, uncomplicated gifts. Gifts from parents to child, sibling to sibling, straight from one account to another. The less complicated the documentation is, the better it will sit with the lenders themselves.
What: Employment verification is very straightforward. The lender calls the borrower's employer to verify the borrower's job position, length of employment, and strength of future employment. If the borrower decides to provide full documentation, lenders also have the right to verify the amount of monthly income the borrower earns.
Why: Verification of a borrower's employment is important to lenders due to its very nature--income. If a borrower does not have a job then there is no monthly income to pay the mortgage payment, which puts the lender's investment direectly at risk. The lower the risk, the happier the lender.
Rent Verification, Mortgage Verification, or Cancelled Checks
What: Similar to credit checks, a borrower's rent or mortgage is another line of credit that has the ability to contribute to the analysis of your credit history. The borrower's mortgage consultant will obtain verification of your rent or your mortgage through the borrower's landlord or mortgage holding company. The borrower needs to provide the landlord's contact information or the mortgage company's name and account number. There are cases where verification of rent from private parties such as family members or individual property investors, will not be sufficient for the lender's records. In these cases there are lenders that have more flexible guidelines allowing for 12 months' worth of cancelled checks to prove timely rent or mortgage payments.
Why: Just as previously mentioned, verifying the borrower's rent history or mortgage history is a method of analyzing his or her credit history. The more information the lender can obtain regarding the borrower's payment history, the better picture the lender can paint for the future. If the borrower makes timely rent or mortgage payments, this is a strong indication that he or she will continue making prompt payments for the new property.
Do you have other conditions or lender requests that you want to know morffe about? Contact us to get your questions answered. Now you know how the lender thinks and therefore why they ask for certain conditions and documents; hopefully this will help you feel more comfortable with the loads of information you are required to provide
|
