Financial Check-Up: 10 Steps to Get Mortgage Ready

SANTA ANA, CA–(Marketwire -01/09/12)- Whether you’re financing or refinancing, the thought of applying for a mortgage can be scary. After all, a lot of folks say the mortgage marketplace has largely closed down and that home loans are difficult to get, if not impossible.
“More than four million existing homes were sold in 2011 according to the National Association of Realtors,” said Steve Patton, executive vice president with Carrington Mortgage Services, a lender with 27 offices, and licensed to do business in 42 states. “How can there be so much real estate activity without financing and refinancing? Mortgages are clearly more difficult to get than they were during the real estate boom a few years ago, but millions of loans are still being issued.”
So what’s the secret to getting a home loan in today’s marketplace?
The application process is a lot easier if you prepare in advance.
“The lender has a list of necessary documents which will be needed to create the loan,” said Patton. “While paperwork requirements can vary, borrowers generally have most information in hand. The trick is to organize financial information in advance so you can be mortgage-ready.”
The purpose of a financial check-up is to identify what lenders want and to place that paperwork in a file so you’re ready to apply for a mortgage. The result is that when you apply for a loan, all the required documentation will be in hand and your application will have a great chance to fly through the underwriting process.
What Lenders Really Want
There are lengthy guidelines outlining what lenders need to document loan applications. For borrowers, the best approach is to assume that lenders want everything required for your particular situation and to build an application file from that perspective.
What do you need? Patton said his firm has a lot of information online (www.carringtonhomeloans.com) and that most borrowers can use Carrington’s 10-point application checklist to start a basic file.
1. Income: Tax returns and pay stubs. Have complete tax returns and W-2s in hand for the past three years — just in case a lender wants to go back more than two years. The same with pay stubs: always have the last three or four stubs in the file. If self-employed you may also need a year-to-date profit-and-loss statement, especially if you apply for a loan late in the year.
2. Debts: You must disclose all debts. Lenders will generally have some idea of what you owe from credit reports. However, you’ll need to document debts including account names and numbers, the amount owed and the required monthly payment. Make sure to include debts such as: car loans, student loans, mortgages and credit card accounts. The best approach is to have the latest three monthly statements for each account in the file.
3. Credit: Lenders will pull both credit reports and credit scores from the three major credit reporting bureaus. A credit report can be seen as a history of credit use while a credit score is a statistical measure of credit usage. Borrowers can get free copies of credit reports from AnnualCreditReport.com. Three months before applying for a mortgage get a copy of your report and check it for factual errors and items that are more than seven years old (10 years for bankruptcies). “If you find errors or out-of-date items,” said Patton, “contact the credit reporting agency or creditor to get them removed. Inaccurate information can hurt credit scores and affects the borrower’s ability to qualify in some cases.”
4. Assets: Assets are a sign of financial stability and financial stability very much pleases lenders. Pull together the latest three statements for such things as retirement accounts, stock brokerage accounts, mutual funds, savings, checking, etc.
5. Gifts: If you’re buying property with help from an outside source, lenders will require a gift letter from the donor which confirms that the money you received was not a loan. Note that you can’t get a “gift” from the seller, builder, broker or anyone with an interest in the transaction.
6. VA Loans: Those seeking a VA mortgage but are no longer in the service will need to provide a Certificate of Eligibility (Form DD214). If currently on active duty, lenders will want a letter from your commanding officer to verify service.
7. Divorce: A large number of marriages end in divorce but the usual claim that 50 percent fail is debatable. What’s not debatable is that divorce can impact mortgage applications. Applicants must report all required alimony and child support payments — think of them as a form of debt. Recipients need not include alimony and child support payments in loan applications, however such payments can be counted toward qualifying income if documented.
8. Bankruptcy: More than 1.5 million people declared bankruptcy in both 2010 and 2011. You can sometimes qualify for a new mortgage within two years if the bankruptcy was caused by a hardship such as the loss of a job or a medical emergency — and you have re-established good credit. Lenders will require a bankruptcy to be fully documented, including copies of the petition and discharge.
9. Foreclosure: If you have a foreclosure, expect to wait two to five years for a new mortgage — but longer for those who “walked-away” from a home loan. Lenders will require details regarding exactly what happened and why, as well as a strong credit history after the foreclosure.
10. Rentals: Your tax returns should tell the financial story regarding any rental units you own. Depreciation from rental units — often a big item — can be “added back” to boost qualifying income. Also, lenders will want copies of leases.
“By creating a financial check-up and having the required paperwork in hand, you’ll be able to move quickly through the process and hopefully avoid application headaches and hold-ups,” said Patton. “The 10-point Carrington application list is a way to get started at your own pace, to see what information you have and what verifications you need.”
For a specific list of documents and verifications, speak with lenders well before entering the mortgage marketplace.
Peter G. Miller is a widely-published writer who specializes in mortgages and real estate
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