Why Do They Need So Much Documentation????

During the booming years of the early 2000’s borrowers became more and more accustomed to providing less and less documentation for their mortgages. To some degree this made sense. Excellent borrowers with salaried income, significant assets and large equity positions really shouldn’t need to provide 2 years tax returns, 3 months of bank statements and 4 different forms of ID. Unfortunately, reduced documentation began to filter its way down to nearly every borrower. At the end of the boom, there were lenders offering stated income, stated asset loans to borrowers with credit scores below 600.

Now that the worm has turned, the pendulum has swung in the opposite direction. After nearly 2 years of losing money on mortgage portfolios lenders now want to see a lot of documentation from nearly every borrower. What you need to provide will vary according to your scenario but let’s look at what you should be prepared with when getting approved for a loan:

1. Paystubs covering the most recent month - with stated income loans going the way of the dodo your paystubs will provide the lender with a method for establishing your income and ability to make your new mortgage payment. In most instances, your most recent paystub will do but I would advise erring on the side of caution and providing stubs for the last month. Some lenders require it and it’s easier to just get all of your documentation together at once.

2. a. W2’s covering the most recent 2 years -Your W2’s allow the lender to see your income history and verify that you have a track record of earning a soldi income. Often 1 year will do, but some programs and lenders want 2 years so again, let’s just get them up front.

2. b. Tax returns covering the most recent 2 years - IF your income is derived from any of the following, the underwriter will want to see your tax returns for the last 2 years: rental income, commission income, self employment. These should be with your W2 so it shouldn’t be too much trouble. When a lender requests your “tax return” what exactly do they want? They want your Federal 1040 form. This includes all schedules such as the Schedule A, C and E as they provide important details depending on your situation. The lender does not need to see your state return as the Federal return contains all pertinent income data

3. Bank statements covering the most recent two months, all pages, even if they are blank - These may not be necessary in a refinance transaction where no money is needed to close but it’s never a bad idea to provide them. Human and automated underwriters always like to see that you have reserve funds in case you run into financial trouble.

3. Retirement and investment account statements covering the most recent 2 months or 1 quarter - See item #3. Even though you won’t be using these funds for closing, they always look good on your application.

4. A copy of valid US identification - With the Patriot Act lenders now need to verify your identity with valid identification such as a driver’s license or passport.

This may seem like a lot and you may ask yourself, “Do I really need to provide all of this?” The answers is sometimes no but in the current market you can save yourself and your mortgage planner a lot of headaches by providing a complete application package upfront. This will eliminate unhappy surprises later on and allow your mortgage planner to issue a complete credit approval knowing there are no unpleasant surprises or uncertainty hiding around the corner.

A complete package will also allow your mortgage planner to search the widest array of potential lenders. In today’s market every lender has set it’s own guidelines to protect against bad underwriting decisions. If we document your file with the bare minimum documentation it could prevent your loan from being submitted to another lender who offers better terms but requires more documentation.

The bottom line: It’s in everyone’s best interests to get a complete loan package put together as early in the process as possible. The small cost in time is more than made up for in headaches and roadblocks avoided. And it could even save you some money!

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