What Do I Need To Apply For A Mortgage?

Recently, we’ve given prospective homeowners some advice on how to get pre-qualified to start shopping for their next home. That was basically a scrimmage – now it’s time to get ready for the real game. Let’s say you’re ready to apply for an actual mortgage now. You’ve found your home – what’s next? Maybe you already own a home, and now you’re thinking about refinancing. “But, it’s been x amount of years since I’ve refinanced,” or, “I’ve never done it on my own before,” you may say. When it comes to a formal loan application, here is everything you need to know!

The 4 Elements Of A Mortgage Application

The first element is income. Your loan officer needs a clear understanding of your ability to repay on the mortgage. This is crucial to your eventual underwrite. When your application is submitted to underwriting, the main thing the underwriter wants to know is “Will this income continue into the foreseeable future?”. Painting a clear picture of what kind of income you have and how often it comes into your possession can save you a lot of headache mid-process. If you’re an employed person, your loan officer needs to know the following information:

1. What is the official name of the company you work for?
2. What is their phone number for employment verification? What is the physical address that you report to work at every day? (If you’re a remote employee, the address on your paystub works fine.)
3. What is your current job title? How long have you been in this line of work? What month and year did you start at the company?
4. How are you compensated? Is it hourly, salaried, or commission-based? What is your rate of pay before taxes and deductions?
5. Do you work full time or part time? Do you get laid off seasonally?

If you can give your loan officer these details upfront, it can prevent a misunderstanding later once the loan processor contacts your employer for verification. If what you tell your loan officer matches what your employer will tell your processor, your loan officer can give you an honest opinion on whether your income is strong enough to apply for what you want. Keep in mind that your loan officer does not replace your underwriter, and the underwriter’s decision trumps that of your loan officer. However, the mortgage professionals here at Mortgage Center do a rigorous calculation before submission to make sure we represent your income with as much fidelity as possible, so we don’t waste your time or money.

If you’re self-employed or a contract worker, your income will be determined by what’s on your tax returns from the last two years. Your loan officer needs to see all the pages of your tax returns, so having your CPA gather them for you prior to application is a good idea. If you’re retired or on social security, your loan officer will need to see documents from the source of the income verifying your gross monthly distribution. The most common thing I’ve heard in my career from people on social security is that they can’t find the most recent benefit award letter. Instead of waiting in line at the social security office, you can visit https://www.ssa.gov/manage-benefits/get-benefit-letter to get a new one within a few minutes! Your loan officer can provide specific instructions on what documents you will need for pensions, IRA distributions, or income you receive as a caregiver for someone else.

The second part of the formal application is the property. Be detailed about the property you are buying or refinancing in terms of:

1. Condition (which includes ongoing or necessary repairs or renovations)
2. Construction style (stick-built, manufactured, attached condominium, etc.)
3. Value based on recent sales of similar houses within one mile of yours (this is mainly for refinances, as the value of a purchase usually follows the contract price)

During my career, I’ve personally seen many deals fall through because a homeowner failed to disclose things like holes in the roof or siding, visible water damage, or exposed floorboards or wall studs due to renovations. If you’re specifically borrowing money (like a cash out refinance or home equity loan) to repair your home, this may get in the way of your closing, and it’s possible you could lose your application deposit. Just lay it all out in the beginning so your loan officer can give you honest advice! Also, everyone thinks their house is the best one on the block (and it probably is!). When guessing at a value for your home, consider the temperature of the market in your area, because that’s where the appraiser will pull your value from. Your loan officer is not allowed to suggest a value (it’s a violation of mortgage practice), so the more research you do on your own, the more accurate your loan officer can be with your quote.

The third piece of the application deals with your assets. This is especially important for a purchase because the source of the funds you’re bringing to the closing table will determine whether or not it is allowed for your transaction. If you have money sitting at home in a safe or under the mattress, you should deposit it into a financial institution (like one of our trusted partner credit unions!), and it will need to sit (or “season”) for 60 days prior to the date of the application. If you’re getting a gift from family, they will need to be able to write you a check, and, depending on the loan program, your underwriter may need to see the family member’s bank statements as well.

Money laundering is a serious problem in our society today, and unfortunately, many people use real estate transactions to clean dirty cash. For this reason, underwriters are obligated to do a deep dive in the source of funds used. We promise – we’re not asking questions about your money just to be “all up in your business”. We need to make sure the money you’re using comes from a legitimate source, and we need to see statements to make sure the money isn’t magically appearing overnight in your account.

Finally, the lynch pin of the application is credit. I’ve said it before, and I’ll say it again – credit is king! Your credit history will play a major role in what kind of loan program you can apply for and what kind of interest rate you receive. If you’ve had a major derogatory event in the past seven years, please tell your loan officer up front. Examples are:

1. Bankruptcy (chapter 7 and chapter 13)
2. Foreclosure
3. Short sale/deed-in-lieu
4. Judgement/repossession
5. 90 or more days late on a mortgage/past due mortgage balance
   1. If you’ve been 30 or more days late, you should tell your loan officer as well
6. Loan modification

Each lender has a minimum qualifying credit score. Mortgage Center, like most lenders, does a tri-merged credit report based on the FICO scale. We pull from the three major credit bureaus, Equifax, Experian, and TransUnion, and your qualifying credit score is whichever score is in the middle. If you’re applying as a couple or a family, whoever has the lowest of all the middle credit scores usually determines the qualifying credit score for the entire application. Your loan officer can advise you more about exceptions to this rule when you’re ready to apply. If you’re debt-free (yay for you!), this could mean that there is not enough recent credit activity to generate a score, so don’t be surprised if your loan officer advises getting some good debt in your name to get a number to report soon. If you want to talk to a credit expert, you should talk to a housing counselor through the Consumer Financial Protection Bureau, or CFPB. They usually offer credit repair services at little to no cost! You can check the services of housing counselors in your area by clicking this link and entering your zip code: https://www.consumerfinance.gov/find-a-housing-counselor/

That's It! You're Ready!

Those four elements, income, property, assets, and credit, make up the backbone of any loan application. Doing your homework, having open and honest communication with your loan officer, and talking to other financial experts can help you prepare for your loan application. The application process doesn’t have to be scary, and if you ever want to talk about something unique to your situation, just call the Mortgage Center application line to speak to a licensed loan officer today!