If you haven’t gotten a mortgage before, you might be surprised to find out that your lender needs more documentation from you than you thought. The main reason for this is that the mortgage industry is highly regulated and is required to prove that every person who borrows money has the ability to repay that debt at least for the next 3 years. So, they need to gather lots of information about your past so that they can try to predict your ability to repay in the future.
But, why doesn’t a lender collect everything they need all at once? Well, unfortunately, it’s not that easy. Every person has a unique financial picture and that means that they all may require different levels of documentation.
In a perfect world, most lenders would be able to approve borrowers with just a credit report, paystubs and copies of bank statements. However, what if your pay varies from month to month or you decide to buy new appliances for your home? That would cause your debt to increase and add a new layer to your financial picture that your lender would need to document.
When More Information is Required
In most cases, the reason more information is required in the process is because more information is uncovered as your documentation is reviewed. For example, a merged credit report from all three credit bureaus gives lenders a solid idea of your debts and how good you are at paying them. But that picture is often incomplete.
To be more specific, if you pay child support, those payments will not show up on the credit report, but may show up on a paystub. Nor will debts you owe to business partners or family members, or installment payments to the IRS for taxes. The lender may find those things by reviewing your tax returns. Even though these debts do not show up on your report, they still impact your ability to take on more debt—so lenders need to know what they are. If you are divorced and make child support or alimony payments, for example, your lender will need a fully executed divorce decree documenting them.
Self-employed borrowers will also be asked to submit more documents than borrowers with salaried jobs. Because they won’t have paystubs or W-2 statements, self-employed borrowers will typically be asked to submit personal tax returns and maybe even tax returns for the business itself. If you’re self-employed, you’ll also be asked to submit a year-to-date profit and loss statement and a balance sheet of your business. This is to show the lender your income has remained the same since your last tax return.
Other Documents You Might Be Asked For
If there are any blemishes with your credit, the lender’s underwriter may ask you to write a letter of explanation, also known as an LOE or LOX, explaining the circumstances behind the event. In fact, the underwriter may ask for a letter of explanation for anything they’re not sure about, such as a gap in employment or some unusual activity in your bank accounts. If they do, don’t panic. They’re simply looking to clear things up as well as show other parties that are buying or insuring the loan that they did their due diligence.
If you’re making a down payment on the home you want to buy, the lender will want to know where the money will come from, and you’ll be asked to document you have that money available for withdrawal at closing. If any of the down payment funds came from a family member, you’ll be asked to provide what is called a “gift letter” from the family member, explaining that the money is a gift and does not need to be paid back.
And, if you are early in your career, you may even be asked for a copy of a college transcript or diploma. This may seem odd, but its really just to help lenders establish your employment history.
In the event that you earn income from other sources, such as rental property, or Social Security income, the lender will ask you to document that, too.
The bottom line is there’s nothing unusual about being asked to provide more documents after you submit your application. It’s absolutely normal. The key is to be prepared to provide them as quickly as possible, so your loan can close on time.
All of this seems very stressful, but it doesn’t need to be. At Right By You Mortgage, you’re not alone in the process! Our team of experts can guide you on what documents you’ll need to gather. Give one of our mortgage experts a call at 1-877-552-2242, or drop us a note to inquiries@rightbyyoumortgage.com. We’re here to help!
