Buyers often wonder what bureaucratic torture they are going to be subjected to in order to obtain a mortgage. Therefore, I asked Russ Martin of Perl Mortgage to explain the required documentation for a mortgage application.
In general, a conforming loan (i.e. conforms to the guidelines established by Fannie Mae and Freddie Mac) will require the following documentation:
- Driver’s license
- Two years w-2’s
- Two year tax returns, all schedules. If self-employed, we will also need two years business returns
- Most recent 30 days paystub(s)
- Three month’s statements for all assets – checking, savings, 401k/investments. The bank will want ALL pages of the statement, so if the statement says Page 1 of 4, they need to provide all four pages even if one page is blank
- If paying rent to an individual, they will also have to provide 12 mos of cancelled rent checks
- Any large deposits or movement of funds on the asset statements will need to be verified
- If not a US citizen, we will need a copy of their work visa such as an H1-b.
Keep in mind that these documentation requirements could change over time. And non-conforming loans could have different requirements – possibly even more stringent than the list above.
The list doesn’t look too onerous unless you have a complicated financial situation. For conventional financing, banks pull a 4506-t which is a request to get copies of the borrower’s tax returns from the IRS directly on every mortgage. Most underwriters will ask about other income that is showing up on the returns if it is not documented. For example, you may be getting a salary and w-2, but you may also have income as a minority partner in a small business. They are going to see that on the tax returns and request information on it. This is the primary reason I ask for the borrower’s copy of their tax returns ahead of time so I know about it before the underwriter does. That way we can prepare for the questions that are going to come up.
It used to be easier to deal with borrowers who have more complicated financial situations back in the day when we had stated loan programs which is what those loans were for. However, they were abused so now it doesn’t matter how complicated an individual’s personal/business life is…. EVERYTHING has to be documented.
The reason most borrowers complain about the paperwork is because most borrowers never really sit down and get themselves pre-approved and truly prepare for their financing ahead of time. This is why financing is so spotty and inconsistent on real estate transactions. Realtors are really disconnected from how their clients truly shop for mortgages. Most borrowers aren’t nearly as qualified as they think these days because they really have no idea what it takes to get a mortgage. Combine that with the fact that they also are so focused on getting the lowest rate and what they perceive to be the best deal, it causes problems because they wait till the last minute to really get their financing in order because they don’t want to commit to anyone ahead of time fully until they know their rate/fees which can’t be guaranteed until a property is under contract which is when we can lock rates. So in short, most borrowers don’t know squat [edited for a family audience] about their ability to buy a house until they are under contract.
Part of this is probably driven by big bank advertising which shows the call center monkey talking about getting pre-approved in five minutes. No one gets approved to borrow hundreds of thousands of dollars in five minutes.