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The mortgage industry has experienced myriad changes in the last 30 years. Recent tightening of underwriting standards have made the process paperwork heavy, with much of that burden falling on the borrower's shoulders. If you're a first-time home buyer, or haven't been through the mortgage qualification process in a number of years, here's an idea of what to expect.
It's becoming more difficult to find lenders who will provide accurate pre-approvals or interest-rate quotes over the phone or online, and for good reason. With underwriters scrutinizing borrower's documents very closely and using conservative income calculations, it's important for a mortgage loan officer to have the borrower's complete financial background before issuing a pre-approval or discussing interest rates. Quoting a borrower's interest rate depends on a variety of factors, so if you're lender is quoting you a rate before you have provided documents or detailed information, you need to ask some questions.
What Documents Will I Need?
If you're applying for a mortgage, whether a purchase or refinance, you will be asked to provide identification (usually a driver's license and social security card to verify your identity), recent pay stubs or income letters for social security/retirement, recent bank or brokerage statements and the last two years of W2s and complete tax returns. Also, many lenders require standard letters of explanation regarding items on your credit report, such as inquiries or former addresses. Other, more detailed, letters of explanation may be required as well if there is a unique situation being addressed.
If you're refinancing, you will have to gather the documents listed above, plus provide current mortgage statements for all mortgage loans, including home equities, plus escrow statements, home owner's insurance, and paid property tax statements.
Prior to the 1980s and 1990s, in order to obtain a mortgage you typically had to put 20 percent down on your home. Today, loan programs allow as little as 3 percent down, but the lender will require mortgage insurance, which protects the lender against borrower default. Having the mortgage insurance companies involved in the loan is another reason why lender's must provide detailed documentation to support the borrower's ability to repay the loan.
Obstacles to Closing
Once you've received a pre-approval from a lender, don't assume it's smooth sailing. Any new credit inquiries, new credit cards/auto loans or new charges on your credit cards will appear as supplements to your credit report, and the lender will get notified of this activity. Also, more documentation is required prior to closing, including updated bank statements and pay stubs. Job changes can also be deal breakers, so be sure to discuss any life changes/events with your mortgage loan professional.
While these changes may seem extreme, and to anyone who is not computer savvy these document requests can be overwhelming, keep in mind the lender is just gathering documents to supply to the underwriter, who is the person that "clears" the loan to go to closing. The underwriter needs to match the loan application information to the documents provided, so if he or she asks for another document to complete the puzzle, simply provide your information in a timely manner. When the lender and borrower work closely together, the path to closing becomes a smooth one.