For homebuyers, the mortgage application process is a very stressful time that requires answering many personal questions related to work, income, and debt. Mortgage applicants expect to be asked to verify their employment and income, but can be suprised to find a wealth of additional questions that loan officers ask to verify and document where every dollar comes from in order to prove to underwriters that the borrower can repay the loan.
In the early meetings with borrowers, taking time to outline what will be required, and why, will go a long way to prepare them to successfully meet the requirements of the loan application process. These conversations will also foster a foundation for open communication throughout the loan process if expectations are set and clearly defined. To help with this, we’ve provided a list of suggestions to consider before asking the borrowers too many questions. These suggestions are grouped by topic..
Job History. As the lender, you will ask the borrower to provide a two-year history of employment, including a contact who can verify that the borrower’s claim. Counsel the borrower what additional information might be required and how the information will be evaluated. For example:
- Share that you will be looking to see if the borrower has been in the same job or line of work for a significant period of time, ideally two or more years. Explain that this shows that they have stability.
- If the borrower has been in school, let them know that as the lender, you may be asking them for a college diploma or transcript to confirm that they were in school at that specified time.
- Advise the borrower, if possible, not to switch jobs until after the loan closes. This simple action can quickly get their mortgage approval terminated.
Income. Typically, you will ask the borrowers proof of income that can include recent paystubs, W2’s, and tax returns when the borrower is self-employed. Share with the borrower that you are looking for steady income because you want to see that the borrower brings in enough income to pay the mortgage. Consider sharing more information, such as:
- If there are income discrepancies such as with bonus and commission income, this can trigger additional questions that will need additional information.
- That, if the borrower receives Social Security, child support, or income other than wages, they will need to provide documentation to confirm that income will continue.
- That, as a self-employed individual, the borrower will need to provide extensive documentation and answers to questions about their business and income.
Credit History & Debts. Let the borrower know that you will be reviewing their credit report to review their debt-to-income ratio. Ask the borrower to review their credit history before applying for a mortgage to make sure that the record is accurate. Share, for example:
- That debt is a significant consideration for lenders because it is a picture of the borrower’s financial stability. The more obligations the borrowers have, the harder it will to keep up with that debt, and it will affect their ability to pay the mortgage on time.
- That debt is not necessarily a bad thing when applying for a mortgage. Assure them that most applicants have some debt. Confirm that you will be evaluating the type of debt and how much debt they have. This is a good time to review the concept of the debt-to-income ratio and how it is used for loans.
- That you will be examining all of their debt, including other mortgages, car loans, student loans, alimony, and credit cards. You want the borrower to be in a situation where their monthly debt payments are a reasonable amount of their pre-tax income. Define what desired debt level means, in terms of percentage, and provide an example.
- That, if the borrower has any disputed debts or debts that have been repaid, they may need to provide proof of payment and, in some cases, have the issue erased from the credit report before they can qualify for the loan.
- That it is essential that they avoid making any big purchases, such as buying a car, during their period where they are trying to get a mortgage. A car purchase can throw off the credit situation and usually means taking on a lot of additional debt. This is often one of the major mistakes borrowers make.
- That, if the borrower has a number of recent credit inquiries, lenders may ask if they have taken out other loans or new credit cards that have yet to show on the credit report.
- That missing payments on a loan may be an indication that you cannot keep current on a mortgage loan.
Saving and Assets. Outline that you will want to know exactly where the borrower’s savings and assets have come from to ensure that the borrower is not borrowing money from a third-party to make the down payment. Share, for example:
- That gift letters are required (when applicable) and need to meet lender restrictions.
- That you will want to verify how much money the borrowers currently have in their bank accounts and any investments they have. You will be looking to see, for example, if they have at least two mortgage payments in their savings.
- That you know things happen when the borrowers buy a home, such as something breaking and needing repair. You want to know that such a situation will not wipe out their bank account and that they will have enough savings to survive the first period of homeownership and still make the payments.
Divorce and Legal Matters. This is always a touchy area, but important to address with the borrower. Share, for example:
- That legal issues, especially if the borrower is a plaintiff, could impact home financing. Lenders want to know if the borrower is involved in a lawsuit because of the potential cost and the possibility that a judgment may go against the borrower.
- That you are concerned with the financial details of a divorce because of the possibility that a borrower could be held responsible for an ex-spouse’s debt. In addition, if the borrower is seeking to include child support or alimony as income on the borrower’s loan application, you will need proof that the income will continue.
About the the author
At CBC Mortgage Agency, we offer Nationwide Down Payment Assistance in the form of second mortgages through the Chenoa Fund program. We offer five different second mortgage products, each with their own individual underwriting requirements and guidelines, in an effort to provide options to borrowers of any income and most DTIs. Our options include products for both FHA and conventional loans; some of our products include 0% interest rates and no monthly payments.
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