For those who have ever closed on a mortgage before, you know that on top of all the complicated ins and outs of selecting a mortgage, there is a ton of paperwork to bring in, look at, and sign. This guide can help buyers with what kinds of documents are needed and which disclosures will be received during the process.
Documents to Gather
Prospective buyers in the Bay Head area may hear from friends and family members that it takes forever to get approved for a mortgage. The timing lies almost entirely in the underwriting process, where the lender has to verify the information written in the application. If all necessary documents are gathered beforehand and provided with the application, it will take less time.
The means of proving employment depends on the type of employment prospective buyers have. Most people can just show pay stubs from the past couple of months to show that they are currently employed at a company. If a buyer has just taken a new job but has yet to start it, they might consider something called an “offer letter mortgage.” People switching careers or getting a promotion and a big raise within the same company often want to show that they will have a higher income to increase the amount they could potentially borrow. Applicants who are self-employed or own a business should show 1099s, profit and loss statements, and one year of tax returns.
For most loans, the lender will expect buyers to provide very specific details about their monthly income. This part relates directly to the amount buyers could be approved for, so it is wise to put in every viable form of income. You can count regular income from:
- employment (including overtime pay, self-employment income and second jobs)
- disbursements from Social Security or other retirement accounts
- child support or alimony (if you can show the court order and regular payments)
- investments (with set limits on the kinds of investments that qualify)
The goal is to decrease your debt-to-income ratio, and to maximize your income up for consideration. For anything beyond your regular job, provide additional documentation of the disbursements
Lenders also like to look at your existing assets, to determine if you have the means to pay your mortgage if your income drops. Although owning a home or a piece of valuable property, oceanfront or otherwise, could technically be considered an asset in certain arenas, lenders prefer to look at monetary assets, which include:
- money in savings accounts or certificates of deposit (CDs)
- documented gifts from relatives
- retirement funds, such as a 401k or independent retirement account (IRA)
- investments in stocks or mutual funds
Lenders usually require a number of months in reserve, which range from 3–12 months on average. The lower your risk, the fewer months in reserve. Provide bank statements for savings and records of your investments.
Taxable income is a particularly useful term to remember, when you think of how to establish your income for the application. This is also why lenders typically ask for at least a year of tax records. They want to confirm that the income records provided match up with a borrower’s tax return. For example, if an applicant has a second job that provides part of its income in tips, they may want to include their tips in the application to boost their income. However, if they do not claim the tips on their taxes, the lender knows to ask for further evidence. Self-employed people are also asked to provide at least a year of tax returns and profit-and-loss statements, to show that their businesses serve as a steady source of income.
On the application, the lender may ask prospective buyers to estimate the amount of debt owed in total, including the minimum monthly payments. This task completes the data needed to calculate the debt-to-income ratio for your ability to qualify for a mortgage loan. Since the lender can easily bring up most the basics of this information in your credit report, it is wise to be as comprehensive as possible. Make a list of all your debts and their monthly payments, including child support or alimony if applicable. Collect copies of the most recent statement for each debt you owe.
Paperwork Provided by Lender
Compared to the documentation given to the lender, the paperwork received in return is quite minimal. This is deliberate, to make sure loan-seekers do not lose important details in the shuffle of papers.
The Loan Estimate is the most recent form of documentation that lenders are required to give to those seeking a loan. This government-mandated paperwork aims to make borrowing money, especially as much money as you need to buy a home, as clear and easy to understand as possible. The Loan Estimate summarizes the terms of the loan that the lender offers to you and must be given out within three business days of submitting application. In the Loan Estimate, you will find:
- the loan type (e.g. fixed-rate loan, adjustable-rate mortgage)
- the length of the loan’s term
- the initial interest rate
- details about any interest rate changes, if relevant
- information about changes in monthly payments, if any
- a list of closing costs
- a total of the closing costs and down payment
People seeking to take out a loan should read the Loan Estimate carefully and keep it for when the time comes to close on the loan.
While the Loan Estimate is just an offer, the Closing Disclosure reflects the final terms of the loan before you close on it. Once you accept the terms and close on the loan, the details of the Closing Disclosure become your responsibility to pay. The Closing Disclosure offers much of the same types of information as the Loan Estimate. In some cases, the amounts you are expected to pay or your interest rate, may have changed. When you arrive to examine and sign the Closing Disclosure, bring a copy of your Loan Estimate and compare the numbers. If there are any differences, you should ask why you are expected to pay more or less. It may be that some issue was brought up during underwriting, or that the interest-rate lock you established in the Loan Estimate had expired. In any case, you should confirm that you understand any differences in the sum before you sign.
Dealing with paperwork for a mortgage loan is a fact of home buying. By understanding the documentation involved, prospective home owners can get a head start on the process and have a clearer idea of what to expect from lenders.