Want to buy a home but feel intimidated by the mortgage application process? Here’s how to avoid common headaches when navigating home loan applications.
You’ve heard that getting a mortgage ranges from “insanely difficult” to “practically impossible for mere mortals,” right? If you’ve been reading this site regularly, you know that it’s nothing of the sort; if you have reasonable credit (620 or higher for a conventional loan) and can document your income and assets with the mortgage application, you’ll get your loan with few, if any, problems or delays.
Even though the belief that lenders have crazy-high standards today is completely false, the process of getting a mortgage today is more exacting than it once was. Underwriters, who review applications and approve loans, go over every little detail in the loan package, uncovering possible defects or problem areas.
This attention to detail doesn’t mean they’re looking for reasons to deny your loan; believe it or not, underwriters LOVE to approve loans. They are just making sure all the pieces of every loan puzzle fit together as they should.
If you understand what the underwriter is looking for, you’ll be better prepared – and your loan will sail easily through the approval process.
You’ll give your loan officer a month’s pay stubs to document your income. You’ll also provide last year’s W2. If you get overtime, you’ll have to document that you’ve received it for at least 24 months. If that’s not possible, you won’t be able to use that income to qualify – no matter how much money it is.
Make sure that your HR department is prepared to fill out the Verification Of Employment form (VOE) completely and correctly. If they just lump all your income into one number and your pay stub says you get overtime, you’ll have a problem. The same goes for any annual or quarterly bonus you may receive.
In general, you have to show that you have been in the same line of work for at least two years. If you’ve been working at your present job for just six months, your loan officer will get information about your previous employer.
Provide all salary information for any previous jobs, along with full contact information for the previous employer(s). The underwriter WILL require a VOE from the previous employer.
If you were laid off for a month or so, but went back to work at a different company, you’ll be fine, so long as you can explain any gap in a reasonable way.
Write a letter of explanation about any gaps in your job history. Do this before your loan officer submits your loan. It is far better to be proactive.
Related: Getting a Mortgage in Washington State When Self-Employed
No, we’re not talking about that special bottle of 30-year old scotch. If you are buying a home, you’ll have to pay cash to close your escrow. You will have to provide documentation for all money going into the transaction. If your cash is sitting in a savings account, you’ll provide two months’ full statements for that account.
This is where you can run into trouble if you’re not careful. Specifically, you’ll have to document any “large” deposits to the account. “Large” would mean deposits not identified as payroll, tax refund or transfers from other documented accounts and which exceed 10% of your gross monthly income.
Keep in mind that if you transfer money from another account, you’ll have to provide statements from that account as well. That account will be subject to the same kind of scrutiny.
While your mortgage application is in progress, avoid moving money around if possible.
If you receive a “large” sum of cash from some source, like selling a car, be prepared to document the receipt of those funds, assuming you deposit them into one of your accounts.
If you have a generous relative who loves you so much that they will give you a gift of cash to buy your home, you should know about the procedure for gift funds. First, your donor will sign a Gift Letter.
This simple form says that they are making a gift of x-number of dollars for the purchase of your home, that it is a gift, and that it does not have to be repaid. The donor will also have to provide a full bank statement showing the source of the funds they are giving you.
Be sure your donor is aware of this procedure and is willing to hand over a full bank statement. They can’t blackout or edit anything on that statement, or else the underwriter will reject it.
Your loan application will list your previous addresses for at least the last 24 months. Your credit report will show the same information – with one important difference: the credit bureaus are often completely wrong about past addresses.
One common example: you may have lived at your present address since January, 2014, and the credit report lists that. But they may also list your previous address from five years ago, but ending June, 2015. This would obviously be wrong, but it brings us to another point of advice.
Check for address discrepancies on your credit report. Write a simple letter of explanation to clear up your actual residence addresses and dates.
Related: How hard is getting a mortgage these days?
These simple notes don’t have to be elaborate or wordy. Just briefly explain the issue in question. Address the LOE “To Whom It May Concern,” sign it, and date it. Being proactive will save you a great deal of time.
While it’s true that getting a mortgage is not as easy-peasy as it once was, paying attention to these details will make it seem like a breeze.
When you use these tips to cure your application headaches, you’ll have a much better experience, especially if you’re buying and selling a home at the same time. Make the rest of the move up process easier with our ebook, which you can download by clicking the button below.
At Sammamish Mortgage, our loan officers can help you navigate the mortgage application process, and you can do almost everything online with our intuitive preapproval system and secure document upload portal.
Sammamish Mortgage has been in business since 1992, and has assisted many homebuyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help you get preapproved. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon, California, and Washington.
Contact a loan officer if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.
Common delays include incomplete income documentation, unverifiable employment history, unexplained gaps in employment, large undocumented bank deposits, missing gift fund paperwork, and address discrepancies on the credit report.
Lenders commonly ask for a recent month of pay stubs and the most recent W-2. Additional documents may be required if income includes overtime, bonuses, or other variable pay.
Overtime income is generally usable only if there is a documented history showing it has been received consistently, often for at least 24 months.
A job change does not automatically hurt the application, but lenders usually want to see a stable work history in the same line of work and may verify information from a previous employer.
A short letter of explanation should clearly state why the gap occurred and when employment resumed. A reasonable explanation can help the file move more smoothly through underwriting.
Lenders review bank statements to confirm that funds needed for closing are available and properly sourced. They also look for unusual or large deposits that may require documentation.
A large deposit is generally one that is not clearly tied to payroll, a tax refund, or a documented account transfer and is big enough to require additional sourcing under lender guidelines.
It is usually better to avoid unnecessary transfers during the application process. Moving money between accounts can create extra documentation requirements for each account involved.
Gift funds typically require a signed gift letter stating that the money does not need to be repaid, along with documentation showing the donor’s source of funds.
Lenders compare the address history on the loan application with the credit report. If the dates or addresses do not match, a brief letter of explanation may be needed to clarify the correct residence history.
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