Mortgage Loans and the role of the Secondary Market
The secondary market is where mortgage loans are sold by mortgage lenders and banks and purchased by investors. The secondary market provides a number of benefits for mortgage originators and mortgage lenders, which in turn provides benefits to home loan borrowers.
In order for the secondary mortgage market to work effectively and efficiently, uniform mortgage lending standards needed to be established. The secondary market promoted standardization and uniformity of credit requirements, loan types and loan documents and required forms. This standardization could be a detriment to those potential home loan borrowers that needed special financing but a standardized market improves mortgage rates and greatly facilitates the home loan borrower’s process of comparing and shopping mortgage rates and terms.
Providing liquidity to the mortgage market so that mortgage lenders and investors can buy and sell home loans is the primary value and function of the secondary market. A market to buy and sells mortgage loans allows the mortgage lenders to offer competitive mortgage rates and keep and continual flow of funds available for mortgage lending.
The secondary mortgage market permits mortgage lenders to obtain cash required to fund new home loans at any time. The liquidity in the secondary market also encourages investors to participate and purchase home loan and mortgage backed securities, as the investors can be confident that the home loans can be readily sold at a later time if necessary. The liquidity in the market provides a constant flow of new money into real estate finance that helps to maintain and orderly and competitive market.
Liquidity that is inherent in the secondary market also allows the mortgage lenders to manage their interest rate risk. Mortgage lenders not only have the ability to sell the mortgage loans they originate but they can buy mortgage loans with different terms and mortgage rates to maintain a diversified mortgage loan portfolio. An investor in mortgage loans or a mortgage lender can buy home loans with different mortgage rates and within different geographic areas.
From the mortgage lenders perspective, risk that is in mortgage lending that can be ameliorated through the secondary mortgage market includes interest rate risk, liquidity of funds risks and potential default risk through loan portfolio diversification.
The major institutions that which invest in the secondary mortgage market include the Federal National Mortgage Association or FNMA, the Federal Home Loan Mortgage Corporation or FHLMC, the Government National Mortgage Association or GNMA and a variety of banks and institutional investors.
FNMA, FHLMC and GNMA are government sponsored enterprises that guarantee mortgage loans, purchase mortgage loans and establish portfolios of loans for sale as mortgage backed securities. FNMA and FHLMC operate with conforming loans while GNMA handles FHA home loans and VA home loans. The majority of home loans that are closed meet the lending criteria that are established by one of these entities. Home loans that are originated that do not meet the guidelines established by these entities are often referred to as portfolio loans since the mortgage lender is not concerned about loan resale and holds the mortgage loan for their own portfolio.
Employment and Income Calculations for a Mortgage
In order to qualify for a home loan, standard ratios are applied to the borrower’s income and debt payments. For conventional conforming mortgage loans the standard ratios are 32% and 38%. To calculate these debt ratios the mortgage lender needs to measure the borrower’s debts and income.
The first debt ratio measures borrowers new monthly mortgage payment divided by gross monthly income. The second debt ratio measures the monthly mortgage payment plus all other contractual monthly payments divided into the gross monthly income. These two debt ratios are often referred to as the front end ratio and back end ratio in the mortgage lending industry.
When applying for a home mortgage, a borrower should not only be aware of these debt ratio requirements but how they are calculated. When these debt ratios are calculated, one of the hardest measurements to calculate and often improperly calculated components is the borrower’s gross monthly income. What appears to be a simple calculation is often made difficult because of the borrower’s employment history and income fluctuations as well as guidelines that are mandated by the mortgage industry.
The anticipated amount of gross monthly income and likelihood that it will continue must be established to determine a borrower’s capacity to repay a new mortgage loan. Income that can not be verified or will not continue or is not stable, can not be used to calculate debt to income ratios on a mortgage loan request.
Gross monthly income will be checked by the mortgage lender for consistency and continuity. Once a stable income and employment position is considered acceptable, the mortgage lender will need to calculate gross monthly income based on historical pay and employment verification. Standard income is calculated by analyzing the average income and hours worked as well as the contractual relationship with the employer.
If the mortgage loan borrower is paid twice a month, then the gross monthly pay from the two most recent paychecks is added together to determine monthly income. If the borrower is paid every other week, then the gross bi-weekly paycheck is multiplied by 26 then divided by 12 to determine the monthly income figure. If the home loan borrower is paid weekly, the weekly gross pay is multiplied by 52 then divided by 12 to determine gross monthly income.
Mortgage loan applicants that have stable income with set employment contracts are the easiest gross monthly income calculations for the mortgage lender. For example; a school teacher that is paid a $60,000.00 per year should have a w-2 from the previous year that reflects that income amount and pay stub that confirm and monthly income amount of $5,000.00.
However, a construction worker that is paid $25.00 per hour may or may not be as easy a calculation to determine the monthly gross income. If the worker is consistently working a set number of hours per week, the gross monthly income is achieved by multiplying the hourly wage by the number of hours worked per week, which is then multiplied by 52 weeks and divided by 12.
If a mortgage applicant receives overtime or bonus income the income can be used to qualify for the home loan with restrictions. The borrower must have received the bonus or overtime income for a period of at least two years and the income has to be determined as likely to continue at the average rate of the past two years.
Part time or seasonal income may be used to qualify for a home loan if the income has been earned for a period of at least two years and is likely to continue.
Commission income can be included if it has earned for a period of at least two years and will be determined by the mortgage lender based on an average of the past two years income. If the commission income shows a decline over the two-year period the mortgage lender may deny the inclusion of the income to qualify for the mortgage loan request. Commission income that has not be earned for more than one year will generally be excluded from gross monthly income calculations.
A borrower may qualify for the home loan request if they have earned commission income for less than one year but have earned income not including commissions that would be sufficient to qualify the borrower for the mortgage.
Commission income must be verified with two years of signed federal income tax returns along with one month of current income pay stubs. Any business expenses or unreimbursed business expenses declared on the tax return will deducted from the gross pay calculations.
Unemployment income may be used as qualifying income for a home loan request if the income is recurring and consistent. The test for recurring and consistent income is documentation of two years history in income and reasonable belief that the income will continue. Examples of recurring unemployment income includes seasonal workers or recurring factory layoffs.
Any income earned that is legal non taxable income may have the savings that would have been paid as tax added back into the monthly gross income calculations to qualify for the home loan request. The process of adding income to non taxed income sources such as social security income is referred to as grossing up the income in the mortgage lending industry
The amount of income that can b added to the regular income that is not subject to federal income taxes must not exceed the appropriate tax rate for that income amount. The mortgage lender must document and support the additions to the income. The mortgage lender should use a tax rate that is appropriate for the borrower’s income level and should not be greater than 25%.
Projecting future income to qualify for a home loan is not allowed. Projected raises or self employed income that has not been documented can not used for qualifying purposes.
There is no established limit regarding the amount of time a home loan applicant has to have on a job to qualify for the home loan. The mortgage lender is generally required to verify the home loan applicant’s most recent employment covering the past two years. Gaps or periods of time of unemployment does not mean that a borrower will declined for the mortgage loan request but employment gaps should be explained and documented.
Although a home loan applicant will have to document gaps in employment that are longer than one month, seasonal unemployment is an acceptable source of income, recent school graduation is acceptable.
Frequent job changes that are either lateral moves or advances in income and position are not considered high-risk employment and income situations. But, the mortgage lender is required to document or assess the probability of continued employment which can either be accomplished in writing or determined by reviewing the previous to years employment and income history.
Home loan applicants that have recently returned to work after a prolonged absence from the work force may pose a problem for the mortgage lender to consider the total monthly gross income of that borrower. The mortgage lender will generally try and document a two-week employment history that excludes the long employment gap and will usually require six full months of income on the new job.
Standard employment verification procedures for new home loan applicants will generally entail a process of validation that is dependent upon the source and type of income the borrower obtains.
Salaried borrowers will generally need to supply to the mortgage lender the borrower’s most recent two years W-2’s and pay stubs that cover a 30 day periods of time. The mortgage lender will generally verify employment by phone or in writing if sufficient data is not obtained over the phone.
Overtime and bonus income must be verified with two years W-2’s and a written employment verification to ascertain the rate of previous bonus and /or overtime income and the likelihood of that rate continuing.
Child support or alimony may be used to qualify for a mortgage loan. The mortgage lender will be required to validate the divorce decree and the borrower will have to supply at least three months of canceled checks verifying receipt of the income. Child support, alimony and social security that is not received for those of retirement age must be verified to continue for at least a period of three years into the future.
Social security income and pension income is often paid to individuals by direct deposit. These sources of income will be verified by reviewing the bank statements in which the funds are direct deposited. These sources of income will generally be verified by the sender with annual awards letters. The mortgage lender will request a copy of the most recent annual award letter as well.
Rental income will need to be verified with tax returns and leases. The average of the last two years of net rental income will be used as the monthly income figure. Often, this figure is negative since many rental properties generate a loss for the owners that can be used to offset other taxable income sources. Unfortunately, the only help in overcoming the loss is to add in the depreciation charges that may be on the tax return for the property to calculate an adjusted gross rental income amount.
A mortgage loan borrower that owns more than 25% of a business is considered self employed on most all mortgage programs. Self employed borrowers will have to two years of corporate tax returns f the business owned is a schedule C or S corporation. If the borrower runs a sole proprietorship, two years of personal income tax returns will be needed.
Understanding the needs of the mortgage lender to calculate and verify income will help a borrower understand the mortgage loan approval process and expedite that approval.
Tips for a Fast Home Loan Approval
As a potential home loan customer, everyone wants to search and find the best mortgage deal and the best mortgage rate that they can. It seems everyone in the market for a new home loan is looking for the best mortgage rate for the lowest costs on a loan they can have right away without delay. For some prospective borrowers that find a mortgage lender or mortgage broker that is well respected and skilled, it is likely they will not have any problems in your search.
Sometimes, however, choosing the best mortgage lender doesn’t always equal a deal that is done the most swiftly. Mortgage loans that are not completed in a timely manner may unfortunately result in higher costs. Delays may bring higher costs due to a purchase not closing on time, higher costs to pay for additional services to complete the home loan transaction or higher costs due to the expiration of a mortgage loan lock that results in a higher mortgage rate.
If your home loan is supposed to close within 30 days but it winds up taking longer you may have to pay a higher interest rate because of the delay or worse experience a lost opportunity because you didn’t get the funding in time.
It is important to be able to evaluate the services of your mortgage lender or broker so you know what the home loan approval process entails with that mortgage lender so the loan closes in a timely fashion without extra costs and headaches. The first task should be to have some knowledge about the mortgage loan process as a whole. Knowing the different steps in the mortgage process will help avoid delays and unnecessary halts in the loan process and closing.
The first part of this process is the mortgage loan application and the submission of supporting documents. If the mortgage application process is not done right, the mortgage loan approval process gets off to a rocky start that will often lead to problems and delays.
It is in your best interest to make sure that your mortgage lender or broker has all of your personal information that is needed, and that the information is accurate and correct. Often a delay can be because of simple errors that are easily avoided.
This errors may slip by because the borrower did have the accurate information to complete the loan application or supply the necessary supporting documents or the error may occur because the home loan borrower did not think it was necessary to fill in all the details on the mortgage loan application or the loan officer was more interested in getting the loan application into processing rather than making sure it was completed properly. Whatever the reason, a simple rule is that the more information there the easy the process becomes.
When you complete a mortgage loan application it is important to make sure you fill out the application completely. The mortgage loan application details, among other things, your income, assets, and a description of the home you plan to buy or refinance. The application and the supporting documents is the most important step in the home loan approval process. This is where the information is garnered to calculate income, credit and debts outstanding. A well documented application helps avoid errors and improves the speed at which the data can be verified.
The process of completing and submitting the home loan application requires documents such as W-2’s and tax returns for the last two years, pay stubs covering a 30 day period, bank statements for the last two months, the purchase contract or a mortgage statement of the mortgage loan is for a refinance. Recent credit card account statements may also be routinely required.
Here are Some Easy Steps to Submit a Complete Mortgage Loan Application:
Double check that there are no spaces or blanks left on your mortgage application before you sign.
Make sure that when you sign the agreed terms spelled out in writing are what you are expecting, and do not be afraid or be shy about asking questions before you sign.
Anything you do not understand, don’t hesitate to question your mortgage lender before you sign. If there is a delay it won’t be because you didn’t understand what the process was.
Make sure you keep copies of all the documents and important papers and have them handy to produce if required.
Make sure you have given the data requested. Stress this point with the mortgage lending institution. If you give them everything they requested, the ball is firmly in their court to close the loan.
Make sure you understand all of the mortgage loan features, what they mean, and what may be available for other home loan programs. This includes the bottom line for what you are responsible to pay. As simple as this sounds, it avoids confusion and unwanted surprises.
Before submitting a mortgage loan application, search and find the mortgage lender that will give you the best service, and offer the best quotes for a low mortgage rate on your home loan. Once you find your mortgage lender, do not hesitate to give them all the financial details they need. Give them details on assets, your income, your debt situation, and your job history. After giving your mortgage lender all the information you have to give, follow up with them frequently, and make yourself accessible should they have questions and don’t be intimidated, do your research and remember this is your request; you can control many aspects of the process.
Home Mortgages and the 4 C’s of Lending
All you need to do to make sure you have a better success rate in getting your home loan application approved at the terms you want is education and preparation regarding the process the lenders go through to approve your request. When evaluating your request for a mortgage loan, a mortgage lender will assess the application you have filled out with the supporting documents you have submitted. This process is referred to as underwriting the home loan. During this stage, the mortgage lender investigates the integrity of the data and evaluates the risks in order to qualify the applicant.
The home loan application is a summary of your assets, credit and income position at this particular point in time. It does not measure your character nor does it measure potential future changes such as potential employment changes or debts that maybe incurred or satisfied.
In order to evaluate your present position the mortgage lender will review your financial position, take inventory of your assets, income and credit profile. This procedure is accomplished by verifying your employment, verifying the funds you have on deposit with financial institutions, verifying the equity in the home by appraising the property, reviewing your debts outstanding and analyzing your credit history. This process has become highly automated with computer modeling and approvals but the underlying process is basically the same.
These criteria that are evaluated were once referred to as being the four C’s of lending or collateral, capacity, credit, and character.
Collateral - Collateral is a measure of the value, condition and marketability of the property. The mortgage lender will order an appraisal to determine the market value of your home. From here the loan to value or equity position in the property is determined. Loan to value is the ratio of loan amount to the appraised value. If the borrower is agreeing to down payment of $10,000.00 on a $200,000.00 home, the loan to value will 95%. This formula works on the refinance as well. If a borrower wishes to refinance an amount of $100,000.00 on a $200,000.00 home, the loan to value will be 50%. Loan to value (LTV) and the appraisal are the biggest factors in measuring collateral. Lower loan to values leave more equity in the property and is inherently less risky for the mortgage lender since it not only cushions the mortgage lenders risk but leaves more at stake for the borrower.
Capacity - Capacity is short for capacity to pay. In regards to mortgage qualifications the capacity to pay is measured by housing and debt ratios. The mortgage lender will ascertain the borrower’s gross monthly income first. The new housing payment on the mortgage requested is calculated as well as a summary of all contractual debt payments. Capacity is then measure by dividing the monthly mortgage payment by the gross monthly income to obtain the housing ratio and then dividing all contractual debt payments by the gross monthly income to get the total debt ratio. For example, if the total obligations of the borrower were $1,400 ($1,000 for housing expenses and $400 for other credit obligations), the housing ratio would be 25% ($1,000/$4,000 = 25%) and the debt ratio would be 35% ($1,400/$4,000 = 35%). Lower housing and debts imply greater capacity to pay a home loan back and hence lower risk.
Credit - Credit is evaluated by reviewing the credit report and the credit score. With the use of credit scoring, credit evaluation has become one of the simplest attributes of a loan request to measure. The credit is broken into three primary categories. Mortgage lenders will use credit scores, known as FICO scores, to determine the overall credit risk of the home loan borrower. From here a review of the public records such as, tax liens, bankruptcy filings, and judgments will be assessed. Finally, the individual accounts or trade lines in the credit report will be reviewed for delinquency, credit amounts, depth and length of time on accounts. Generally speaking, the higher the credit score the better the credit risk.
Character - Character is a qualitative measure of a borrower’s stability, integrity and honesty. Measuring character was mostly a measure of a borrower’s commitment to their credit and the new debt they intend to take on. Character may be classified as a measure of responsibilities with the loan commitment. Since mortgage lending and underwriting is almost entirely based on quantitative analysis, character is predominantly ignored. Since it is difficult to evaluate the risk and to even measure a borrowers character, in residential mortgage lending this gauge is rarely used.
Qualification for most mortgage loans and the mortgage rate a lender will charge depends on these three main factors. Understanding the basic guidelines and having knowledge of what a mortgage lender looks for in analyzing your loan request will make your mortgage application and homeownership experience and far smoother and less nerve racking experience.
Mortgages from the Dark Side, the Rebellion has Started
The trouble in the mortgage lending industry was first revealed to me shortly after accepting my first job in finance. Upon graduating college with a finance degree I took the first finance job available. Since I had bills to pay and the job market was weak I took the first employment opportunity offered. The job was an assistant finance manager at a local finance company not far from my apartment. The company was engaged primarily in the origination and collection of personal loans and mortgages, mostly second mortgage or home equity loans. This finance company was a division of what is now the eight largest bank in the nation. Not the best job but far from the bottom.
Shortly after the training concluded, I learned that there were three activities you took part in at the finance company. You sold the consumer loans, you closed loans and you collected the loans or the payment on the loans. We ate lunch and used the facilities too, but other than that we sold loans, we closed on the loans and we collected the loans. The reason we spent so much time collecting loans was that the delinquency rate at finance companies is fairly high and it is necessary to stay on top of the customer in order to make sure the client makes timely payments.
Nothing overtly wrong with these lending activities. Except, there were at least two glaring immoral deeds that we committed. One was that we spent a third of our time on the phone selling loans. Let me shed some more light on what I did. I was on the phone selling loans to your neighbors constantly. These sales calls had a strong pitch and were performed with unrelenting tenacity by myself and peers in the industry. Sure it was a fairly high interest rate since this was a consumer finance company and we did not offer the most competitive interest rates and your neighbor really didn’t need to be bogged down with more debt, but I was selling money. I sold a consumer loan, either a personal loan or second mortgage to help your neighbor buy a new car, go on a family vacation or maybe even consolidate debt.
It isn’t necessarily cocky to tell you your neighbor didn’t stand a chance. I sold the low monthly payment, hell I couldn’t sell the outrageous interest rates, I sold the neighbor how he can use this money for the vacation his wife and kids deserved, I sold an escape, a low monthly payment escape that your neighbor was entitled to. He didn’t stand a chance; he couldn’t say no. He took the loan. I wasn’t going to let home say no. Sometimes that took 10-15 phone calls until they said yes.
Once I closed the loan, which is lending speak for having the customers execute and sign the appropriate loan documents and disclosures, and some timely monthly payments were made, I picked up the phone and sold your neighbor more money. I sold the benefits of refinancing and taking out more cash on top of the existing loan so he can finish the patio and buy the new grill and eat some tasty USDA prime rib eyes. He went for it. Hey, he didn’t stand a chance, I was good at it, and we were selling money.
Sales rule number one in most businesses is that the present customers and former customers are your best candidates for additional sales, in our case that would be additional loans or larger loans to the existing accounts.
After a few years or even one or two years, I may have refinanced this customer three times and elevated his debt load significantly. Eventually, this loan and the other debts your neighbor has are killing him. He can’t make all the monthly payments. His wife is now pissed given that she can’t use her credit card at the grocery store since the credit card limit has been reduced because they can no longer make their payments on time. And after numerous sleepless nights, the neighbor finally decides to go for a fresh start and files bankruptcy.
This is a situation I witnessed every year in consumer finance and mortgage origination’s, equity extraction with first mortgages and home equity loans as well as consumers loans and excessive credit card use was letting consumers live well beyond their means. These individuals and families were making $75,000.00 ( as an example ) and when I would pull their credit report one year later they had an additional $15,000.00 in debt. That doesn’t sound crazy at first except you have to consider that these are mature workers who are not likely to be looking at large pay raises in the foreseeable future. So, Mr. & Mrs. Jones are making $75,000.00 and I add their new debt and it appears they are spending $90,000.00.
The easiest solution for them was to incur more debt with a home equity loan or mortgage refinance and keep the party going, never paying attention to the fact that they spend more than they make almost every single month of the year. And this was common.
Eventually, the music stops and these people can no longer borrow more money or consolidate what they have to a lower payment and it times to pay the piper. Their house of cards built on easy money comes to end with bankruptcy, foreclosure and other unpleasant outcomes. Some customers run to file bankruptcy to eliminate these consumer debts or create a new manageable payment plan, but most of my customers agonize for months over the thought of bankruptcy. It tears their family apart and it weighs them down terribly.
The company I work for has a position on bankruptcy that is similar to most mortgage lenders, banks and credit card companies which is that bankruptcy is evil and should be restricted. At the Dark Side Lending Company, we even attended the bankruptcy hearings. This is a very uncommon practice. Chase Bank, Chrysler Financial, Countrywide, none of these creditors would normally attend a personal bankruptcy hearing. We do, basically to shame the customer into making payments or reaffirming the debt with us.
There I am, the man who may be the most responsible for driving this family into bankruptcy because of my sales skills and the incredible marketing support of Dark Side Lending. Boy was I ashamed. I see this family in bankruptcy court and my heart falls into stomach. I can recall all the sales calls I made to them over the past couple of years. Not a few sales calls, but sales calls every other month, every year. Telling them how great it would be to take another loan.
I wake the next morning and do this all over again. Over sell the loans, close on the new loans and collect the payments one way or another. It got to the point where I took a shower before I went to work and I took a shower when I get home to clean the filth of the industry off of me. A practice I repeated at various lending institutions I worked at for the next twenty years.
These families, your neighbors, which are struggling with payments for a whole host of reasons one of which is because I sold home loans they could not afford. Sure they had responsibility. But, I can not emphasize enough, I am good at my job. I can sell loans. You don’t stand a chance, you try to say no but I’ll get you eventually. And it wasn’t just me. Lenders whether they are mortgage lenders, banks or credit card companies across the nation market and advertise in the mail, on the phone, on the Internet on prime time TV and late night TV. You can’t escape the marketing muscle of the Dark Side of Lending.
One day when I was watching the Bears play with my dad and we had a discussion on consumer debts and bankruptcy. At this time, one of the bankruptcy reforms bills was working it way through congress. During this discourse I told him that bankruptcy statues exist because of me. After he laughed for quite some time, he asked for a little elucidation on that statement. I explained that consumers file bankruptcy because of sales men, or finance managers like me who shove these loans down the consumers’ throat and bankruptcy is a necessary evil to even the field against the marketing muscle of the Dark Side of Lending. I assure you the force on the Dark Side is strong.
Why do we have bankruptcy reform to make it harder for the consumer to escape the likes of me, it’s simple. The banks fill the congressional coffers with cash. Oh yeah, the other side of the story is that somehow congress thought bankruptcy reform was good for the nation and the American people. Wow. How is that possible?
Ever since that time, if a friend or a friend of friend asks me about filing bankruptcy and the impact on their credit, etc…my reply is always the same, file and file often. Stick it to the lenders. Run the credit card up and file bankruptcy. It’s your duty as a citizen to make up for all the misdeeds performed by consumer finance companies, mortgage lenders and credit card companies by wiping out the debt and handing a loss to the lenders and bankers.
This was a start of long career working with the Dark Side of Lending. This was just the beginning.
The Dark Side of Mortgage Lending, an Introduction
After twenty years in the mortgage business I have seen the good, the bad and the ugly in mortgage lending. These articles are a series on mostly the bad and the ugly. The stories are all true and exemplify the problems and issues that confront the consumer with regards to mortgage financing.
All of the stories and the commentary should be seen as lessons on what to watch for, what to learn about and how to obtain the best mortgage loan without being a pawn in the battle with the Dark Side of Mortgage Lending.
The Dark Side of Mortgage Lending of course involves bad lenders, bad loan decisions and deceitful loan originators. The Dark Side of Mortgages also involves greedy borrowers, dishonest mortgage loan applicants and mortgage applicants and consumer that are overwhelmed by the process.
Mortgage losses and home financing nightmares are caused by both sides, however; I am not as critical of the consumer because I believe the mortgage lender has some fiduciary responsibility to the borrower and should be held to a higher standard. Having said that, most borrowers are not off the hook with regards to buying a home that was too big or taking out a mortgage loan payment that was that was beyond their budget from the get go. These borrowers may have been easy targets to be influenced by the Dark Side of Mortgage Lending but personal responsibility on the part of the home loan borrower cannot be ignored.
These are stories about the problems in mortgage lending. Problems that cost consumers 100’s of dollars, 1,000’s of dollars and sometimes well north of that figure. As time has passed, the Dark Side of Mortgage Lending has cost all U.S tax payers. Loss of equity through housing depreciation, loss of income due to higher taxes needed to pay for the cleanup of this mess and loss of opportunity as the Dark Side has clearly squeezed the economy and brought about an appalling number of job losses.
Read, learn, laugh, cry and make sure you take the time to understand what it takes to get the best mortgage to suit your needs. Do not cross over to the Dark Side.
Home Loan Preparation Tips and Documents Needed
After shopping to find the right mortgage lender, its time to get ready and submit the mortgage loan application. Hopefully, as a prospective new home loan borrower you have already compared the mortgage loans available and are familiar with the loan qualification guidelines. One of the fundamental reasons to at least garner a basic understanding of the home loan process and guidelines is to aim and discover what documentation will be needed from you to satisfy the qualification requirements with the mortgage lender.
The more you know, the easier the process is. Although, it may seem foreign and a difficult task to understand the mortgage business, mortgage lending is far from rocket science.
Much of the information required by the mortgage lender will be requested shortly after or at the same time you fill out the home loan application. It is important to make sure you supply as many supporting documents as possible to the mortgage lender. Rarely do mortgage companies find that a customer supplied too much paperwork. Conversely, numerous customers of the mortgage lender do not provide the proper paperwork requested and subsequently complain about the amount of time it takes to approve the loans and set up the home loan closing or settlement.
Before panic sets in about the documentation required to approve your home loan request, you will not be asked to furnish your grades from high school. More often than not, mortgage loan approvals are completed through an automated underwriting system. These automated underwriting systems have significantly accelerated the time it takes to process a home loan request. The findings or results of the automated approval are the supporting documents that will be required from you by the mortgage lender. Fortunately, the automated systems have generally lightened the load on needed supporting documents for a mortgage loan.
It is important to understand that the loan approval is dependent on your qualifications and the documentation you provide to support your qualifications. To insure a smooth transaction, it is crucial that you have all your documentation in order before the initial application for the home loan.
Here’s a list of the most common documents needed in order to apply for a mortgage loan and meet the needs of the automated underwriting programs. Your loan application will include many of the following but clearly not all of these will be needed. You may be required to supply more or in fact fewer documents depending upon the type of home loan you’re applying for as well as the strength of your qualifications.
Personal Information:
Copy of your driver’s license.
Copy of social security card.
If applicable: copy of complete divorce, palimony, alimony papers.
If applicable: copy of green card or work visa permit.
Employment Information:
Most recent two years W-2’s.
Most recent pay stubs covering one month period.
If applicable: self-employed will need two years tax returns and YTD profit & loss statement.
Tax returns are generally not required for salaried workers or hourly wage earners that do not have commission income or reimbursed business expenses. For those home loan borrowers that do have reimbursed business expenses, commission income, self employment income or rental income, the most recent two years complete tax returns with all schedules will be required.
Savings and Asset Information:
Most recent two months complete bank statements for any and all accounts with all pages.
Most recent statement from retirement, 401k, mutual funds, money market, stocks, etc.
Credit Information:
Name, address, account number, monthly payment and current balance for: installment loans, revolving charge accounts, student loans, mortgage loans, and auto loans. Most of this data is used to fill out your home loan application and actual copies will not be needed by the mortgage lender.
If the Home Loan if for a Purchase:
Legible sales contract signed by buyers and sellers for purchase transactions.
Copy of the earnest money deposit check.
If a Refinance or you own Rental Property:
Copy of note from current mortgage loan.
Copy of hazard (homeowners) insurance policy.
Copy of the payment coupon or monthly loan statement for current mortgage.
If applicable: If the property is multi-unit, you may need the leases.
The end result of a well prepared loan application, supporting documents and understanding of the mortgage loan process is a file referred to as clear to close. The term used to describe the fact that your home loan is ready to be signed and the funds disbursed.