Getting a pre-approval will help a buyer get their offer accepted. It’s simple; the seller wants to know that the buyer’s mortgage will close on time. That means a house hunter needs to have their pre-approval in hand when they begin house hunting. Murphy’s Law dictates that if you don’t do that, you will find the right place and not be ready to buy it!
Why do mortgage lenders need so much documentation?
Mortgage lending is a highly regulated business. Federal law requires that lenders have documentation that proves that a borrower has the income or assets to pay their mortgage. It’s called the “ability to repay and qualified mortgage rule”. This was done for consumer protection.
A little history: Before the recession in 2008, some lenders were giving mortgages (and collecting their fees) for mortgages written to people who could not possibly pay the monthly cost. After a few months, those mortgages would go into foreclosure. There was a spike in foreclosures. Banks and mortgage insurance companies went bankrupt. Stocks made up of mortgages lost nearly all their value, overnight, when a large insurance company failed. Since then:
Mortgage lenders must prove that any borrower is able to repay their mortgage, based on income, assets, and credit.
What documentation will I have to supply?
- Proof of current or reasonably expected income or assets;
- Proof of current employment status;
- Proof of the total the monthly payment on any simultaneous loan(s);
- Proof of other current debt obligations, alimony, and child support;
- Estimated total of the monthly debt-to-income ratio or residual income;
- Current credit history. [CFPB Ability to Repay]
Expected income or assets. If you work in a salaried job, you will need to show some pay stubs. If you are self-employed, you will need to show some tax returns and sometimes some 1099s. If your income is a new pension, new Social Security, or other income that hasn’t been on a tax return yet, you should bring the grant letter. If you are buying based on your savings, you will need to show your asset records.
Employment. If you have a salaried job, your lender will contact the human resources department, or equivalent, to confirm that you are still working there. If you are in a new job, your lender will want to see your employment contract. If you are self-employed, the longevity of your income in the field, plus any labor contracts you have will help confirm the stability of your income.
Monthly payment on any simultaneous loans. Your credit report will have the monthly payment and the loan balance of any loans you are paying off. Most mortgage lenders use that. Others may want you to locate the initial loan contracts.
Current debt obligations, alimony, and child support: If you are paying or receiving payments from a legal contract, your mortgage lender will need that contract. It documents the amount of money and when the obligation ends.
The monthly debt-to-income ratio or residual income: This comes into play for properties that are to be rented or partially rented. Once you identify a property, you may need to document a reasonable expected rental income. You don’t need to do this when you apply for a pre-approval. However, be prepared to supply a place-holder figure, if you are looking for a mortgage on a rental or part-rental property.
Credit history: Your mortgage lender will get a full credit report. You do not need to do this.