Preparation for the Mortgage Application

Ideally you should start getting your finances in order a year in advance before you plan to buy a home. You want to make sure that you have time to fix any potential problems. First do the obvious things. Always obtain a copy of your free credit report from each of the three reporting agencies at thislink. Ensure that you have not been the victim of identity theft and that there are no inaccurate items on your report. You do not want surprises to pop up later and derail the mortgage at the last minute while you are trying to close on a home. If you find any incorrect entries in your report, write a letter and include what proof you may have to the agency disputing the incorrect entry.

If there are any erroneous entries it will take some time to get them resolved so get the process started as soon a possible. During that year before you buy your new home, don’t take on any new debt. You want to reduce your debt to income ratio if possible. And obviously pay all of your bills on time. File your tax returns. You will need copies of your tax returns for your mortgage application. (You would be surprised how often I encounter people who want to take out a mortgage and haven’t filed a tax return for the past several years!) Start planning how much of a down payment you will have saved up and where the money is going to come from.

Here’s an example where advanced planning could have helped a couple I know. The daughter of a client of mine recently found her ideal home. Unfortunately she and her husband didn’t have quite enough money for a down-payment so my client wanted to help them out by gifting them $20,000. Unfortunately, this complicated and slowed down their approval process considerably because it is a red flag for a borrower to receive a large gift right before taking out a mortgage. First of all, lenders want to know that you can afford your mortgage on your own with your own income and don’t like to see sudden one-time gifts right before closing on a house. Secondly, when a lender sees a recent large deposit, they are concerned that the source of the deposit may actually be a loan from another lender which the borrower may be trying to disguise as some other source of funds.

The bank does not want you borrowing money (even from your dad) to come up with your down payment. Successfully saving up a large down payment is a sign that you have the financial maturity to make your mortgage payments. Furthermore any additional hidden loans means that your true debt-to-income ratio would be different from the one used for the mortgage application. Happily, the couple still closed on the house on time and are very happy with their new home, but my client could have saved his daughter some hassle if he had just given that generous gift a few months earlier so that it would not have shown up on the recent bank statements that the couple was required to submit as part of their mortgage application. Then the gift would not have triggered any red flags.

As you get closer to the time to apply for your mortgage start getting your records in order. Make sure that you have in your possession copies of your tax returns, pay check stubs, and bank statements, or make sure that you can easily obtain these documents. Get in the habit of placing these documents together in a file-folder as they arrive in the mail so that all of the documents that you may need for your mortgage application are easily at hand. Unfortunately it can be nearly impossible to be fully prepared for the mortgage application process. The problem is that the person or people who are processing your mortgage will likely wait until the very last minute to complete the approval process.

Here is an example of what I mean. I recently advised a fairly well-to-do couple who recently purchased a home. He and his wife had a very strong application. The man’s wife was very good at staying on top of the paper-work and shepherding it through the application process. She had read up on the application process and was well prepared. She even asked the loan-officer weeks ahead of time if it would be necessary to get documentation of her husband’s large end-of-the-year bonus from several months before. The loan-officer said no, that would not be necessary as the couple had enough salary that the loan could easily be approved even without the bonus....fast forward to two days before the closing and the loan officer says there is a large bank deposit and that he needs documentation for it.

My friend’s wife was flabbergasted: “That’s the large bonus I was telling you about...remember the one you said that we did not need to provide documentation for?...The one that appears on the paycheck stub that you have had since the beginning of the application process...along with the bank statement that you have also had since the beginning of the application????”

Despite having a paycheck stub with the bonus payment in his hand for almost 3 weeks at that point, and not to mention having the bank statements in question the loan officer still insisted that he needed a letter from my Friend’s employer on company stationery stating that yes indeed this was a bonus, and yes indeed my friend had a decent chance of getting a similar bonus the next year. This proved difficult as my Friend’s supervisor was traveling internationally in a different time-zone, but they did eventually get ahold of him and obtain the necessary document and were able to get the mortgage approved just in time to make their closing date. It was a major inconvenience and source of stress for them obviously though.

That is just the way it goes. Every closing is a little different. Being prepared and organized can make the transaction go more smoothly, but sometimes you just have to be ready for surprises or at least additional document requests as the closing date gets nearer. The days before the close of the transaction are often hectic, with all kinds of new documents being required suddenly. Often documents need to be received before 5:00, and you’ll be at work, while the needed documents will be at home. It can be a big pain to close on a house, but ultimately worth it (hopefully) in the end when you are enjoying your dream home.