I read an article this week titled “From ‘No Doc’ to ‘Every Doc’” on Fox Business. In the article the author complained that lenders have become too strict and make the mortgage process too cumbersome for borrowers. At the same time he rightfully acknowledged that if given the choice between the two, “Every Doc” is a healthier choice than “No Doc” for borrowers, lenders, and the overall economy. If you have read articles or heard stories about how difficult it is to get a loan these days, here are a few tips to help ensure the process is a smooth one.
Have a Documentable Source of Income
For most people this is easy. Employees of companies receive paystubs and W-2’s and their documentation is fairly straight forward. When fluctuating sources of income come into play like commission or overtime additional documentation will be required. Those types of income can be used for qualification provided they are consistent or improving year over year, and are documented for at least 2 years.
Self-employed borrowers have had the toughest transition since the days of “no doc” or stated income loans. Many business owners write-off so many expenses on their tax returns that their remaining documented qualifying income isn’t adequate for the loan amount they seek. Knowing that they need to provide their lender with two years of personal and business tax returns, self-employed individuals should plan ahead and thoroughly consider all expenses in the year or two proceeding when they expect to apply for a mortgage.
Make Sure Down Payment Funds are in a Documented Account
Most buyers save up their down payment in an account in their own name. Sometimes documenting a down payment can get complicated if the funds are in a business account. This situation is not uncommon with self-employed borrowers and can lead to additional documentation.
If the down payment funds are in an account that doesn’t belong to the borrower, then a gift needs to be documented between the owner of the account and the borrower. Sometimes the borrower sells an asset, like a car, that also must be documented so that the down payment funds can be sourced.
When reviewing bank statements to document the down payment, the lender will question any large non-payroll deposit that is greater than 25% of the borrower’s monthly gross income. Since most of the purchase price is covered by a loan, the lender is trying to make sure that the borrower has their own assets (or a documented gift) into the property. It’s their “skin in the game.”
Don’t Add Any New Debt during the Process
While purchasing a home, please don’t purchase a car or any other large item that will cause one to incur debt. Also, if one is purchasing new furniture or appliances for the home, be sure not to buy it on credit without consulting with your loan originator first.
When thinking about buying a home, the first person one should speak with is a licensed mortgage professional. Most real estate agents that value their time won’t even show a buyer a home until they have been pre-qualified by a lender. Consult with your lender first.