Getting approved for a mortgage is more simple than it was three years ago. Lender requirements are looser, minimum credit score standards are lower, and loan approval times are quicker.
As with any financial transaction, though, consumers should be prepared to document their credibility to the bank, as well as their ability to repay a loan.
The good news is that lenders tend to ask the same five series of questions, and you can prepare for these questions in advance.
The Questions Lenders Ask
Today’s home buyers face a different mortgage market as compared to buyers of last decade. There are fewer mortgage products from which to choose and lenders follow a different process to review and approve a loan.
Some of the differences are because lenders act with more caution as compared to last decade. For example, 10 years ago, mortgage lenders tended to trust a home buyer who said a home “was affordable” even if the numbers suggested otherwise.
Other mortgage market changes are linked to new laws — specifically the Qualified Mortgage (QM) law.
Since January 2014, the federal government has enforced rules on new mortgages, requiring borrowers to maintain debt loads less than 43%; and lenders to cap loan fees as a percentage of total loan size.
Lenders must also make sure borrowers can actually afford their monthly payments using a formula based on income, assets, savings and debt.
Because of QM plus the Ability-to-Repay rule, lenders perform additional due diligence on customers which was unnecessary (or left undone) last decade. The extra due diligence often results in additional verifications, questions, and documentation to support your loan approval.
As a home buyer, it’s a good idea to be ready for the scrutiny.
Documentation requirements will vary by lender, but there are certain verifications which all lenders will want to perform.
Whether you’re a first-time home buyer or a seasoned one, you can expect your mortgage lender to ask questions from five broad areas, each important to your approval. This is true whether your using a FHA loan to make a purchase, a VA loan, or anything else.
Only streamlined refinance programs are sometimes exempt.
Your mortgage lender will ask the following questions, at minimum, about your residential history.
What is your current address?
How long have you lived at your current address?
Are you currently renting or do you own?
How much do you pay per month in rent or mortgage?
Have you ever been late on your payments?
What are the names and contact information for your current and previous landlords?
A 24-month residential history is required. Also, you will be required to verify your mortgage or rent payment history.
For homeowners with a mortgage which reports on credit, payment history can be culled from the credit bureaus. For renters, a Verification of Rent (VOR) will be required, which your lender will procure on your behalf.
For non-reporting mortgages, a Verification of Mortgage (VOM) is required. Again, your lender will procure this on your behalf.
About Your Employment And Income
Your mortgage lender will ask the following questions, at minimum, about your employment and income.
What is the name of your employer?
How long have you been employed at your current job?
What is your gross annual income (i.e. How much do you make before taxes?)
Are you a W-2 wage earner, a 1099 employee, or self-employed?
Do you have other sources of income?
Many U.S. lenders will want to verify where you’ve been employed dating back 24 months. Inconsistencies in your employment and/or income type may prompt additional questions — especially if your income is lower in the current year than it was in the year prior.
To support the answers to the questions above, your lender will request documentation including paycheck stubs, W-2 statements, and federal tax returns. It may also contact your employer for a Verification of Employment (VOE).
Employment and income are primary indicators of your ability to repay a loan. Because of QM, lenders will rarely make exception to out-of-the-ordinary circumstances.
About Your Credit Scores And Credit History
Your mortgage lender will ask the following questions, at minimum, about your credit scores and credit history.
What are your 3 major credit scores?
Have you ever filed for bankruptcy?
Have you ever had a foreclosure or short sale?
Do you have any credit accounts currently in collection?
Are you currently delinquent, or have your ever been delinquent, on payments to your creditors?
Have you ever defaulted on a government loan, including student loans?
Much of the above information will be reported on your credit report, but it’s a savvy move to know your credit history prior to an official review. As many as one quarter of all credit reports contain errors — your lender won’t know an error until you disprove it. Have payment histories handy for accounts which you know to be erroneous.
Your credit score is a primary factor in your final mortgage rate quote.
About Your Monthly Debts And Obligations
Your mortgage lender will ask the following questions, at minimum, about your monthly debts and obligations.
Do you make a car payment? What is the payment, and how many payments remain?
Do you have student loans? Are the payments deferred? If not, what are your minimum monthly payments?
Do you have credit card debt? If so, do you pay the balances in full each month, or do you make minimum payments?
What other monthly recurring debts do you have?
Do you currently pay alimony or child support each month?
Do you have other debts which will not show up on your credit report?
Again, much of this information will appear on your credit report but credit reports are sometimes generic with respect to monthly payments. If you’re able to show that you pay your credit card in full each month, for example, you may have an easier time qualifying for your mortgage.
Similarly, if you can show that your student loans are in deferment, your debt-to-income ratios may be reduced.
About Your Cash Reserves And Bank Accounts
Your mortgage lender will ask the following questions, at minimum, about your cash reserves and bank accounts.
What are the balances of your checking and/or savings accounts?
What are the balances of your retirement accounts?
What is the value of your investments in stocks, bonds, and other securities?
Have you made any “large” deposits to your accounts within the last 60 days?
In general, lenders want to make sure that you have ample assets to make a downpayment (where applicable); to cover closing costs which are due at settlement; and, to have at least two month’s worth of mortgage payments available to you.
Expect to provide your lender with recent bank statements, and be prepared to explain “out-of-the-ordinary” deposits such as gift funds or transfers between accounts.
Conclusion
For today’s home buyers, getting a loan approval is easier that during any period in the last 5 years. Approval hurdles are lower among banks, and low mortgage rates have helped to extend buyer purchasing power to their highest levels in more than year.
See how low today’s mortgage rates can be. Mortgage rate quotes are available online at no cost, with no obligation to proceed, and with no social security number required to get started.
By: Craig Berry
