There is a common misperception that obtaining a mortgage is only a possibility for a relatively small fraction of people. The truth is that many of the old requirements for obtaining a mortgage are still the same, or very near the same, today. The ratios we use to calculate affordability must be in about the same range as they were a decade ago. The amount of money required for a down payment varies by loan program, but those amounts are all about the same as they were a decade ago. Credit requirements are about the same as they were before.
So, what has changed? Aside from many of the forms and disclosures we use, the largest changes have been to verification documentation requirements; that is, what we need to obtain to verify your current income, assets, and other relevant information. For example, before the housing crisis, only W2’s were required for most loans; now, however, we are often required to obtain tax transcripts for the last couple of years directly from the IRS and review them very carefully. There is also greater scrutiny of other documents, such as bank statements.
The good news is that you actually have the power to make the process easier. By entering the process informed and prepared, you can avoid some of the hurdles that often cause the process to slow down. Here are just a couple of the more common things that can create issues:
Bank & Other Financial Statements
The rule-makers like Fannie Mae, Freddie Mac, FHA, and the VA all expect lenders to be able to account for and source all of the assets of anyone applying for a mortgage. This usually isn’t too difficult as most people have direct deposits plainly identified as coming from their employer on their bank statements. Where issues often arise is when there are other deposits, especially cash or check deposits.
At a minimum you will have to explain where those deposits came from and what they were for and it is likely you will need to produce some kind of documentation to back up the explanation as well. The concern here is that the funds represent a loan of some kind that may represent a payment arrangement that hinders your ability to repay the mortgage.
Taxes & Deductions
Another area that can cause some friction, especially for self-employed, commissioned, or contracted individuals, are unreimbursed expenses listed on tax returns. Even some regular, W2 employees can be subject to and report these expenses. Unless it can be unequivocally documented that the expenses are no longer occurring, they will be deducted from the income used to qualify for a mortgage as it is assumed that they are necessary for your job and will continue. Again, the concern is that those payments will impact your ability to repay. It is a good idea to go through your taxes for the last couple of years and look at the deductions you claimed. If any of them represent real cash expenditures, be prepared for them to affect your qualifying income unless you can show that they have ceased.
Of course, these are just two examples. Every situation is different so the best way to know what you need to get prepared is to give me a call. We can discuss your situation and look for anything that may require additional documentation. Preparing from the outset can mean the difference between a frustrating experience or a simpler path to settlement.