LOAN DOCUMENTATION: EXPLAINED
What is needed to secure your loan approval. And more importantly, why.
W-2's, TAX RETURNS,
BANK STATEMENTS, SEASONING, SOURCING...
Does the loan application process have you feeling confused or overwhelmed?
We'll walk you thru the what you need to provide and explain what the lenders are looking for.
Helping our borrowers confidently buy their perfect home is what
Simplicity Mortgage is all about.
The loan document submission process can feel long and involved, but when dealing with large amounts of money like a mortgage, its necessary. The lender must have all the applicable details of a borrowers financial situation so they can determine how much they are able to lend and how much risk may be involved. In general, this is what the lenders need to know when a borrower applies for a loan:
We'll walk thru the different documents and required items for each of these categories. They differ slightly depending on the borrower employment or financial situation and/or loan type.
If you don't want to delve into the details, click on the links below to view/print a document check sheet.
LOAN DOCUMENTATION CHECK SHEET:
This is the easiest and most obvious item. The lender needs to ensure you are who you say your are before lending you money. You will need two forms of Government ID:
Driver's license, social security card, passport, birth certificate, etc
Other items that may be needed:
If VA, Certificate of Eligibility or copy of DD214
Divorce decree or marriage certificate (in some cases) to clarify relationship and/or name differences
2. FINANCIAL BACKGROUND:
Financial history plays a large role in the approval process. Providing paperwork for previous foreclosures and explanations for a variety of other issues/late payments, can assist the lender in understanding a past situation.
These are the financial background documents to gather and provide. Some of these items may not be requested initially but in certain scenarios the lenders will ask for clarification during the loan process.
Previous Bankruptcy - papers including all schedules and discharge, credit explanation letter for reason of bankruptcy
Previous Foreclosure - papers including title release for the specific address
Late Payments/Collections - Letter of explanation on any late payments, collections, charge offs or derogatory credit.
Credit Inquiries - Letter of explanation for all recent credit inquiries within the past 120 days outlining the reason and the result of the inquiry.
It is best to share all financial issues with your broker early on to determine the best path forward. Back taxes, unreported foreclosures, or other debts will be discovered and can cause delays or potentially loss of the loan. The experts at Simplicity Mortgage can provide additional guidance on any questions you may have about your situation.
The document that is often required for these situations is called a "letter of explanation". This is a very short document explaining something in the borrowers financial history. The document can be drafted by the broker or the borrower and is signed by the borrower. It should be as concise as possible, perhaps a one liner, and should not contain more information than necessary. You can find more information on letters of explanation here.
3. EMPLOYMENT AND INCOME
Proof of income is a somewhat obvious requirement during the loan application process. It makes sense that the lender would want to analyze a potential borrower's income, to predict their ability to repay the debt. What may not be as obvious, is what the lender is looking for when it comes to income and ability to repay. Here is what they analyze:
Is the income stable/consistent?
Is the income reasonably expected to continue for 36 months?
Does the income have a history? (required history depends on type of income)
Is the income documented?
Reading thru these questions may help a borrower understand why certain documents are being requested. For example when self-employed, two years of tax returns show stable, consistent income. The tax returns also shows the history of the income and that the income is documented. There are different variations of documentation for self employed/small businesses, but include two years of business tax returns and K-1's. W-2's shows income over the last two years so it can be calculated if the borrowers income is stable or increasing. Court documents and birth certificates are necessary in the case of child support to show the amount and if the income is expected to continue for the next there years. For alimony, court documents are required for the amount and if the income is expected to continue for the next there years.
Here is a list of Employment/Income documents that might be necessary:
Recent Income/Pay stubs for 1 month - includes salary, commission, bonuses, tips, hours
W-2's for the past two years
All pages and schedules of last 2 years business tax returns
Benefit award letters (social security, pension, disability)
Two years of 1099's
Last two years of tax returns (if gross up is necessary)
Current lease agreement
Last two years of tax returns with rental income declared
Alimony or Child Support:
Court document with amount and duration
Federal tax returns (provide all pages and schedules).
*These may not be submitted by your broker initially but its best to have on file in case underwriting requests them. This will help to move the process along and avoid delays if requested later.
Copy of statement service letter and off base housing authority letter
4. FINANCIAL RESOURCES AND ASSETS
Most, if not all mortgage transactions involve assets. Whether used for the escrow deposit , down payment, or closing costs, funds will exchange hands. The lenders need to determine first if you have enough for the purchase, and second, they need identify where the funds are coming from. Different loan types have various guidelines about gifts and what amount/percent can legally be used for closing costs or down payments.
To ensure the borrower meets the loan requirements, the lenders take a look at your banking accounts. They calculate your reserves and determine where it came from. During the housing boom, lenders weren't concerned about where the money came from, as long as you had it, but a lot has changed since then. Lenders today what to ensure you aren't obtaining cash from somewhere on a short term basis, simply to meet the cash to close requirements of the loan. They look over your accounts to determine if the money to be used on your home is both sourced or seasoned. Seasoned funds are funds that have been in the account for 60+ days (some lenders require 90 days). Sourced funds are new deposits, but can be traced to another account (in your name) or identifiable transaction (salary deposit, etc.). Deposits can be sourced with cancelled checks, bank statements, or other documents that show the origin of the funds.
If you have some time before you need to submit your application documents, it may be helpful to consolidate the funds you plan to use on your home sooner than later. This may save you time and effort of finding statements and sourcing deposits during the application process.
It's important to keep in mind that the lenders are only concerned about the money you are using for this home purchase. Statements from accounts that are not involved do not need to be provided for conventional, FHA or VA. However, there are some specific mortgage scenarios where assets are used to secure the loan. The experts at Simplicity Mortgage can help to clarify what bank documents are needed.
BANK/ASSET STATEMENTS *only accounts that will be used for escrow, down payment or closing costs.*
All pages of most recent 2 months statements
All pages for the accounts, including checking, savings, stocks, IRA, 401K, etc. Even the page that states "intentionally left blank"
They must show your name, account number, and the name of the banking institution
Bank Statement from the donor showing the funds in the donor's account and a copy of the check from the donors account
Bank Statement from the borrower showing the gift check deposited into your account
SALE OF HOME FUNDS:
Copy of HUD / Settlement Statement
From sale of home and deposit slip showing proceeds deposited into bank account
The final documents a lender requires have to do with the property you are purchasing. They want to verify that the property is adequately covered by an insurance policy in case anything were to happen to the home. In the case of a refinance they need to know the details of your current mortgage so they can complete the pay off.
Insurance: Homeowners Insurance Agent's name, address, and phone number for the property to be purchased.
If it is a large company (without specific agents) provide company name, address and phone number.
Call ahead and set up a quote on your account for the home. Let them know a representative of Simplicity Mortgage may call to request policy documentation required by the mortgage lender.
Refinance: Copy of note and mortgage statement showing the account number.
* Intended to provide guidance. Does not override or replace any guidelines from any lender, Fannie Mae, Freddie Mac, FHA/HUD, VA, Non-QM, private, and hard money lenders.