When it comes to getting a home loan, today’s game has dramatically changed.
A year or two ago, it would have been easy as pie to get any kind of home loan offered — or be creative and basically invent your own terms.
Want an interest-only loan? No problem. Pay option-ARM, where you choose how much you pay? Done deal. Didn’t want to provide any documentation? That works. You could sign up for a super-low teaser rate or choose a loan where you’d make no payments for the first six months to a year just for asking.
While mortgage lenders still pulled your credit history and credit score, no one said “No.” So, even if you had a credit score in the low 500s, you could still get a loan. You might pay a higher interest rate, and maybe even a couple of points (a point is one percent of the loan amount) in fees but someone would say “Yes. Sign here, please.”
Today, home buyers and homeowners are having a lot of trouble getting a home loan. Lenders are saying “No” even when buyers and owners have good credit scores and credit histories.
What has changed is how much risk some mortgage investors are willing to accept in the face of mounting real estate loan losses in the billions of dollars. Unfortunately, you can’t kick-start the real estate market until the panic in the credit markets has abated.
What can you do to increase the likelihood you’ll get the home loan you need? Start with getting your documentation together.
Mortgage lenders aren’t in the tree-saving business. They like paper and they use a lot of it. To apply successfully for a home loan, start by gathering together the following information:
- All W2 forms for each person who will be a co-borrower on the loan. You’ll also want to provide the contact information for the human resources manager, or your direct bosses, so the mortgage lender can verify your income.
- Copies of completed federal tax forms for the last two or three years, including any schedules or attachments. These will be required primarily of self-employed individuals or those who are claiming a history of rental income. Either way, you won’t need your state returns.
- Copies of one month’s worth of pay stubs.
- Copies of the last two or three bank statements for every bank account, IRA, 401(k), Keogh, other retirement account or brokerage account the co-borrowers own. Bring a copy of your most recent statement for any other assets you have.
- A copy of the back and front of your canceled earnest money check plus the escrow deposit receipt. If you don’t get your canceled checks back, then access the electronic version on your account and print it out.
- A copy of the fully-executed sales contract and all riders. You’ll need both brokers’ names, addresses, and phone numbers (if you’re using a broker or agent), and the same information for both your attorney and the sellers’ attorney (if you’re living in a state where real estate attorneys are used to close residential sales).
- If you’re selling a residence at the same time you’re buying it, you’ll need a copy of the listing agreement and, if the home is under contract, a copy of the fully-executed sales contract. (Be prepared to provide the contact information for the brokers and attorneys for your sale as well, if you’re far enough down the line for that.) When the property closes, you may be asked to provide a copy of the actual disposition of funds from the escrow account.
- If gift or grant funds are involved, the giver (or grantor) must provide proof that he or she had that money to give, such as a copy of the giver’s recent bank statement. If you’re receiving a grant, the grantor should provide you with a letter outlining the grant and stating that the funds do not need to be repaid. Be prepared to show the paper trail for the money, including a deposit slip. The giver will have to fill out a gift letter affidavit, available from the loan officer, indicating that the funds were a gift and the gift giver does not expect repayment. In short, a copy of the check, deposit receipt and a bank statement verifying the deposit.
- Copies of all divorce decrees and property settlement agreements.
- Copies of a survey or title insurance commitment for the home you’re buying, if available when you apply for the mortgage, or when it becomes available during the purchase process. In most states, the preliminary title report takes the place of a survey, lenders say. But a survey may be required in states like New Mexico.
- If you’re self-employed, prepare complete copies of the last two years’ federal business tax returns and a year-to-date profit-and-loss statement and balance sheet with the original signatures. Some lenders will agree to use a letter from your CPA stating that you are self-employed or a copy of your business license, but have your tax returns and profit-and-loss handy.
- A list of your addresses in the last two years.
- If you’ve made any large deposits (“large” means anything larger than your monthly salary) into your bank accounts in the last three months, be prepared to provide an explanation with proof as to where the funds came from.
- If you’ve opened a new bank account in the last six months, write a letter explaining where the money came from to open this new account.
- Addresses and account numbers for every form of credit you have. Or, alternatively, many lenders will use your credit history. Be sure to pull a copy from each of the credit reporting bureaus before you apply at AnnualCreditReport.com. Pay for a copy of your credit score while you’re there (approximately $7) so you know what you’re facing.
- Documentation to verify additional information, such as Social Security, child support, and alimony.
- If you’ve had a previous bankruptcy, or foreclosure, make sure you have a complete copy of the proceedings, including all schedules, and a letter explaining the circumstances for the bankruptcy or foreclosure and the discharge certificate.
- For most loans these days, you’ll need a photocopy of a picture ID (usually your driver’s license or US passport) and in some cases a copy of your Social Security card. Also for VA loans you will need to bring proof of enlistment (your DD214) and Certificate of Eligibility for a VA loan (details for this are available at www.va.gov.)
- If you have any judgments against you that have been paid in full, bring a copy of the recorded satisfaction of judgment. But if you have a judgment against you or are involved in litigation, you will need copies of documents describing any lawsuits and may expect to have to settle and pay off any judgments prior to closing on the loan.
- If you are buying a new primary residence and turning your existing home into a rental property, you’ll need to show a signed lease agreement as well as proof of receiving the security deposit from the new renter. You should also be prepared to prove that you have at least 30 percent equity in the existing property.
This seems like an incredibly long and detailed list, and your mortgage lender may not ask for everything on it or may ask for other documentation. But if you want your home loan application process to go smoothly, it pays to get your documentation in order, before you ever apply for a single loan.