All you needed was a pulse. In the not-so-distant past that’s practically all it took to qualify for a mortgage. Now an exhaustive array of paperwork awaits potential borrowers.
Call it the new mortgage reality. Lenders that got burned when the housing market collapsed are taking extra steps to protect themselves and are requiring more financial documents than ever. But that doesn’t mean getting a mortgage has to be too stressful as long as you’re prepared.
Here are five ways to cut down on the hassles and help you anticipate the records you may need:
1. Start by requesting your free credit report.
You won’t receive a score, but it’s important to review a report from the three credit reporting agencies: Experian, TransUnion and Equifax. Make sure the information on each is correct. If you have any late payments or recent inquiries on your report, prepare to explain the circumstances to a lender in writing. You’ll have to settle any open collections, tax liens or judgments before you close the mortgage.
“There is such a thing as not enough credit,” says John Stearns, a broker at American Fidelity Mortgage in Wisconsin. He says some borrowers only have one credit card and no other credit accounts such as car loans, cell phone bills or student loans. Ideally, lenders like to see borrowers manage at least three accounts to show they can handle credit responsibly.
2. Organize all your financial documents.
Lenders will ask for at least two months of pay stubs and bank statements. Pull out 2009 and 2010 federal tax returns, W-2′s and 401(k) statements. If you receive alimony or child support, request up-to-date records from the court, which can take up to 90 days.
Make sure your name, address and account numbers are correct on all statements. If you recently changed your name because of marriage or divorce, make sure the update is reflected on all financial documents and match your identification. The same guidelines apply for your address if you recently moved.
3. Keep your finances simple for at least two months.
“Don’t do anything funny with your money or it could cost you,’” says Pava Leyrer, president of Heritage National Mortgage in Michigan. That means don’t make any out-of-the-ordinary deposits into your checking account; whether it’s gift money, cash from selling a car or payments from giving piano lessons. If you do, make sure to have receipts and copies of checks to give to the lender to show the source of the funds.
One of Leyrer’s recent borrowers had to write a letter to a lender explaining that a $55 bank deposit was birthday money from grandma. Another had to prove that paintings she sold at a yard sale would sell for a similar amount on eBay or Craigslist. Another pitfall: Paying off a large debt ahead of applying for a mortgage. A lender will want to know where that big sum of money came from.
Lastly, don’t overdraw your checking account for at least two months. Even if you have overdraft protection, the lender will think you have cash flow problems.
4. Document your down payment.
That means if you received a large amount from an inheritance, request the documents from the estate trustee to prove you rightfully were given the money. A down payment that taps money from a money market fund or other account requires a statement showing the transfer into your checking account. A 401(k) loan also must be documented.
If you receive all or part of the down payment as a gift from a relative, you’ll be asked to produce a letter that outlines your relationship to the gift giver, the address of the property, the amount of the gift, where the giver got the funds, and a statement that the gift is not a loan.
A good rule of thumb: Any money going toward the down payment should be in your account at least two weeks before closing, including paychecks and bonuses.
5. Show a stable work history for the past two years.
Coming out of a recession, many borrowers might need to explain any employment gaps in writing. Also, those who took temp jobs or switched careers to deal with the hard times, may have to field questions from the lender and may want to wait an additional year to apply. Another red flag for lenders: A wage cut or a change in compensation from, say a salaried position to one where you earn commissions.
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