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Documents Required for a Mortgage

mortgage application documentsIf you're planning to apply for a new home loan or mortgage refinance, the required paperwork may be less than you think. So before spending several hours digging up documents and paying for more than what's required at the copy center, review this list. Whether you're a first-time homebuyer or an experienced real estate investor, there are probably fewer documents needed for a mortgage than you imagined.

Documents always needed to apply for a mortgage

Mortgage reforms passed a few years ago tightened guidelines and forced mortgage lenders to approve home loans only if applicants could afford them. This resulted in an avalanche of additional documents required for a mortgage as lenders sought to avoid ligation and penalties.

Today, the industry is more comfortable with the laws and their requirements, and documentation requests have eased somewhat. In addition, technology advances have cut down on the paperwork you must supply to a mortgage lender.

Here are five things every mortgage applicant must supply before they can obtain loan approval.

  1. Photo ID to prevent identity theft and mortgage fraud
  2. Authorization to pull a credit report (Your lender has the form; you just sign it)
  3. Proof of homeowners insurance (For a purchase, you won't need this until just before closing)
  4. Proof of income (see below for specifics)
  5. Source of down payment and/or closing costs (see below for specifics)

Wage earners who receive W-2 forms may need little else to get approved for a mortgage.

Automated underwriting systems (AUS) and documentation requirements

Most mortgages today are underwritten by software programs. Fannie Mae lenders go through Desktop Underwriter (DU), for example, while Freddie Mac lenders use Loan Prospector (LP). Other lenders have proprietary programs.

Note that lenders can't underwrite all mortgage applicants with software. If you have very little information on your credit report, or a lot of inaccuracies, humans must underwrite your application manually. If your application does not receive an "approve" decision from the software, it may get a "refer" recommendation, which means a human must underwrite it. Manual underwriting guidelines require a lot more documentation.

The great thing about AUS is that they can cut down significantly on the amount of paperwork loan applicants must furnish to secure mortgage approval. First-time homebuyers or repeat borrowers who have been out of the loop may be surprised at how little documentation they must come up with today.

Some lenders even let you just submit a picture of your paycheck and bank statement via text or email.

Minimum mortgage application documents for wage earners

If you're a full-time W-2 employee who does not earn commission or bonus income, you may need just a few documents - enough to prove that you have predictable and sufficient income and funds to close. In this case, you supply these things:

  1. Most recent pay stub, as long as it lists your year-to-date earnings
  2. Copy of most recent bank statement showing funds to close

It's not uncommon to be asked for the most recent two pay stubs, or bank statements covering a three month period. If you are an ordinary W-2 wage earner with a couple of years on the job, you may just need a bank statement and a pay stub. And you might be able to text it to your lender. Probably a lot easier than you imaged.

Additional mortgage documents for wages, bonus or commission income

If you have not been at your job for two years or longer, or have part-time, bonus or commission income, your lender may ask for more information.

If your source of funds to close lists a large deposit or shows bounced checks, you'll probably have to come up with additional paperwork. This also applies if you earn bonuses or commissions of 25 percent or more of your total income. Here are those extras.

  1. Two years of W-2 forms for those with less than two years on the job
  2. Two years of tax returns with all schedules for those with bonus or commission income
  3. Letter of explanation for large deposits, and proof that the funds did not come from a prohibited source (like the home seller, lender, real estate agent, or an undisclosed loan)
  4. Explanation for any bounced checks

These additional documents may trigger requests for more paperwork. See below for situations that might require more documentation.

Mortgage application documents for self-employed borrowers

Self-employed consumers have more complicated profiles, and documents required for a mortgage may be more extensive. These are the people that so-called "lite doc" loans or "stated income" loans were originally created to serve. The idea was to cut onerous paperwork, while still establishing that the borrower has enough cash and income through alternative methods. Stated income loans are no longer legal.

Today, traditional lending programs require income tax forms to verify income. However, other programs use bank statements to determine income for self-employed applicants. Here are the requirements you may face as a self-employed borrower.

  1. Two years (or more) of tax personal tax returns
  2. Two years (or more) of business tax returns
  3. Copies of personal and business account bank statements (two or three months for traditional underwriting, up to 24 months for bank statement loans)
  4. Copies of business licenses and/or corporate filings
  5. Statement from accountant or CPA about the health of your business
  6. Letter of explanation for uneven or declining business income
  7. Partnership tax returns and/or schedule K-1

Underwriters use a complicated form to adjust self-employment income, adding back deductions for items such as depreciation or depletion, because they don't come out of your bank account, and subtracting expenses that were not deducted on your tax returns, for instance the 50 percent of business meals that you did not get to deduct on taxes are subtracted from your taxable income because you did spend the money.

Mortgage documents for unearned income

For income that is not related to employment, you may encounter a wide variety of required forms.

Investors get the same treatment that self-employed borrowers get. if you have a rental home, you must supply tax returns to show your income. That information goes into a different section on the loan application, unless your rental income appears on a business tax return. Other unearned income documentation requirements include:

  • Social security form SSA-1099, award letter or bank statements confirming direct deposit
  • Pensions, form 1099-P, award letter for pension, or bank statements confirming direct deposit
  • Disability, child support, alimony or public assistance require documents proving amount and duration
  • Forms 1099-INT for interest income or 1099-DIV for dividend income
  • Form 1099-B for capital gains from brokerage accounts
  • Tax returns and supplementing documents may be used to document all unearned income

These are the most common types of income. But for any kind, the requirements are pretty uniform. You must show that you're entitled to the income - for instance, with a letter from a government agency, a divorce decree, or the private insurer.

You must show that this income is expected to continue for at least three years, and that you are receiving it reliably. Bank statements confirming deposits or canceled checks cover this requirement.

Additional mortgage documents for specific situations

One thing about mortgage underwriting that can frustrate borrowers is that one document seems to trigger requests for additional documents. Check this list to see if these situations apply, and then be prepared for additional requests.

  1. Divorce decree for alimony or child support income, or to prove that your spouse is paying debts that appear on your credit report
  2. "Gift letter" and bank statements from someone who gifts you money for a down payment or closing costs
  3. Letters of explanation for problems on your credit report
  4. Inspection report for septic systems or wells
  5. Canceled checks (12 months) or a rental verification form showing on-time payment of rent
  6. Flood insurance declaration page for homes in designated flood zones

This list may not cover all possible documentation requests, but it includes a complete view of the most common ones. If you know that your situation is unusual or requires explanation, being proactive and discussing it with your lender can smooth your way to approval and minimize the stress of providing documents for your mortgage application.

Related: Seven Terms Every Homebuyer Should Know

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