Source: Time.com
Samantha Rosen
We know applying for a mortgage can be a daunting process. Between all the paperwork and the anxiety it can generate—not to mention all the money on the line—we understand it can cause quite a few headaches.
We’re here to alleviate some of that stress and uncertainty, starting with some questions you should be prepared to answer, as well as documents you should have on hand, when you meet with a mortgage lender.
Common Questions to Expect from Lenders
When applying for a mortgage, there are a few questions you can expect to hear from the loan officer assigned to your application. The first may be, “What is your price range?”
It’s a good idea to research the price you can afford before speaking with a mortgage lender, says Elliot Pepper, CPA, CFP and co-founder of Northbrook Financial. That will set expectations and help you avoid taking on more than you can afford. A mortgage calculator can help you estimate these monthly payments.
“You have to remember that you don’t live in the purchase price — you live in your monthly payments,” Ryan Serhant, a real estate broker and star of “Million Dollar Listing New York,” told NextAdvisor in October.
You should also be prepared to answer whether you’ve owned a house before, and if you’ve filed tax returns previously.
At the initial stage, you should be prepared to ask questions too, first among them a request for quotes across different mortgage terms, such as 30 years, 20 years and 15 years.
Let’s take a look at some other commonly asked questions when trying to get a mortgage:
Employment and Income
Your lender will be particularly interested in your employment and income status. Specifically, you should be prepared to share with your lender:
- Where you work
- How much you make
- How long you’ve been at your current job
- If you make your income monthly or irregularly, such as via freelancing
Bring additional financial information if you are self-employed, Pepper recommends. This includes copies of forms 1120-S and K-1 for S Corporations and copies of forms 1065 and K-1 for partnerships.
Additionally, the lender might request copies of business bank account statements, he says.
Savings and Other Assets
Your lender will want to know how much money you have in the bank. Of course, the more you have set aside, the better.
This can include savings accounts, as well as brokerage accounts, and any other assets you may own such as stocks, bonds and mutual funds.
If you will not have much left over after you pay your down payment, the lender might be hesitant to approve your mortgage. “The general idea is that the lender needs to feel comfortable that you won’t be left insolvent even before the first mortgage payment is due,” Pepper says.
That’s why financial experts recommend having an emergency fund of savings above and beyond your projected down payment and upfront closing costs.
Down Payment
Many lenders might also ask where you are getting the money for the down payment from, says Lindsay Martinez, owner and financial planner at Xennial Planning.
For example, the lender may ask you if it’s from your savings, a gift, or a family inheritance. Prospective lenders want to know the source of a down payment before agreeing to loan you money, to make sure you haven’t borrowed it and therefore don’t need to repay it, which would add to your debt burden. Be prepared to show documents, like a savings account statement or a letter from the person who gifted you the funds, if they are indeed a gift.
Loan Type
Your mortgage lender will also ask you what type of loan (or loans) you’re considering.
Pepper recommends discussing the implications of non-conventional mortgages such as an FHA loan or ARM loan, as well. The former is backed by the U.S. Federal Housing Administration, and the latter offers what its acronym suggests: an Adjustable Rate Mortgage. This rate can fluctuate as often as once a year, after a period with a so-called “teaser rate” that’s typically lower than on a fixed 30-year mortgage. With mortgage rates as low as they are now, though, ARMs are rarely used.
Fixed rate mortgages are the most common type. With this type of mortgage, your interest rate will not change throughout the duration of your loan.
Property Use Type
Be prepared to share with your lender what type of home you want to buy, and where. They’ll likely ask you if it’s a house, condominium, or another type of dwelling.
They’ll also want to know when you are going to live there — for example, year-round or seasonally.
You’re more likely to get approved faster and with a lower rate if it’s a single-family home that you’ll be living in year-round, as compared to a duplex, condo or the like, or a property that you will only be using seasonally.
What Documents Are Needed to Buy a Home
Martinez recommends being patient, as there will likely be some back and forth with your lender.
You should have these documents on hand when you meet with your lender:
Bank Statements
Bring copies of any of your recent bank statements for you and any co-borrowers, including checking and savings accounts.
Assets
Also come prepared with a list of any assets you may have, in addition to the aforementioned bank statements. This may include:
Debts
Conversely, if you have any outstanding debts, bring a list with you when you meet with your lender. Examples include:
Pay Stubs
To show proof of income, you should also have a copy of your:
- Most recent pay stub
- Most recent W2 form
- Tax returns from the last two years
If you have an influx of money from sources other than work, such as alimony or child support, come prepared with that documentation, as well.
Credit History
Your credit score is a major factor in getting approval for many financial products, and the rate you get on your mortgage depends heavily on it. You should also request copies of your credit reports from all three credit bureaus — you can get free copies of the reports once a year —and make sure they do not contain any mistakes or erroneous information that might damage your credit, lowering your score.
“If you have anything negative on your credit, lenders might ask for an explanation,” she says. For example, if you were 30 days late to pay a bill, they may ask you why that happened.
Check your reports well in advance of meeting with a prospective lender, so you have time to fix any mistakes.
Form of Identification
You’ll need to bring proof of your identification, as well. This can include a copy of your driver’s license or passport.
How to Increase Your Chances of Getting Approved
“Do not make any big purchases or finance anything until after you purchase the home,” Martinez advises.
This is because it can affect your credit score, and make it appear that you may be taking on too much debt in a short period of time. This can also increase your debt-to-income ratio, making you a riskier borrower, which would result in a higher interest rate or even affect the amount of money you can borrow on your mortgage. In some cases, it may even disqualify you altogether.
Martinez also recommends being “realistic” about the purchase. Ask yourself if you can really afford the house, considering there are other expenses to factor in besides monthly mortgage payments, such as insurance, taxes, potential HOA fees, maintenance, and more. She recommends doing your research and due diligence beforehand, so you are not surprised when those other expenses come due.
And keep in mind that a mortgage payment might be your single biggest monthly expense, for a long time, with all that entails. Don’t make the mistake of assuming that just because you qualify for a large mortgage you are set.
“More likely than not, a higher mortgage payment will impact other areas of your financial picture such as discretionary spending, savings, and investing,” Pepper says.
Bottom Line
Getting approved for a mortgage will be a lot easier and a lot less daunting if you go into it knowing fully what to expect. Experts suggest preparing for conversations with your lender with plenty of documentation, and being realistic about what you can afford before you embark in the process.