Qualification Refresher

With over 500 newsletters published, I try my best not to repeat myself and always offer fresh knowledge and insight. Occasionally, like today, it’s a good idea to circle back on important do’s and don’ts when applying for a mortgage (or any other type of credit). This is especially true when it comes to mortgages, because unlike getting a loan when buying a car, the mortgage process is a much longer timeframe.

If you are an hourly employee or paid commissions or bonuses, a Verification of Employment will almost certainly be required. It covers the year-to-date, plus your most recent 2 years. That verification is done to see how stable your income is and will determine what your actual income is for this transaction.

A growing list of employers use a 3rd party employment verification system called “The Work Number”. If this is the case with your employer, you should obtain your employee “key” prior to applying for your loan. That employee key allows us to easily obtain the verification. More times than I have fingers and toes, borrowers been frustrated to go through the process of obtaining the key – not that it is complicated, but it is just one added layer of stress during an already stressful time.

Collect now and scan or put on the side your most recent 2 years of W-2’s and pay stubs. Why do we need those if we get a verification of employment? The W-2’s are used to cross-check with your tax returns. Needing current pay stubs shows your most recent earnings.

If your employment situation changes: Please let your lender know right away. I just recently had a client change jobs a couple weeks before closing. He didn’t realize it was a big thing. Since his income didn’t change, and there was no gap of employment, it didn’t concern him. From our perspective, employment is verified just before the lender releases the funds. If the borrower is no longer employed, that’s a huge problem. Although it wasn’t an issue in this situation, the change in employment and the requirement of new pay stubs is essential. Even with no change in income, this forced the file to go back to the underwriter one additional time for review of the new documentation. If it can be avoided, don’t change employment until your loan closes. If it happens that you lose your job, it is imperative that you let your lender know right away.

You will be required to provide your most recent 2 months of bank statements for any account in which the funds from that account will be used. The thought being that if you were obtaining money from some other source, it would show up as a deposit within those 60 days. That’s why when you have any large deposits showing on the bank statements you provided, you’ll be required to provide an explanation and documentation of where those funds came from.

You are not prohibited from getting money from other sources for your transaction. Gifts from family or transfers from other accounts of yours are fine. If the funds are borrowed, that’s okay too. With a loan, we’ll have to know the terms of repayment to calculate your overall qualification accurately.

All 3 situations require additional documentation.

Gift funds require documentation from the person who gave you the gift.

A loan would require a copy of the note.

If the funds came from another asset account you own, you’ll have to provide 2 months of that asset account statements. This is where is gets tricky and really ticks off a lot of borrowers: The lender will review those new statements just like the original ones. If there’s any large deposits in that account, you’ll need to provide additional documentation as to where those funds came from. And gosh, what if the source were another account of yours?

In the last example above about transferring funds from one personal account to another, you may not realize the hole you’ve dug yourself into. This has nothing to do with hiding money or doing anything nefarious. Some people are what we call “money movers”. There may be good reasons behind what you are doing. I just want you to realize what you’ll need to do when it comes time to source your assets.

If you want to avoid the last 300 words you’ve read, there’s a very easy solution. Plan ahead. If you are getting gift funds, or borrowing money, or transferring from other accounts, do all of that early enough that the funds have already been sitting in your bank account prior to the statements you provided us.

For example: If you were going to apply for a mortgage next week, you’d provide us your most recent 2 months of bank statements. Since next week is November, you’ll give us your September 2021 and October 2021 statements. If your statements run from the 1st to the end of the month, get what ever funds you need into your account before September 1st. Since the deposit was made prior to the September statement, your opening balance would already reflect the inflows. With this scenario, you will not be asked for any additional documentation!

Did you know that it is required by the federal government that you be provided a free copy of your credit report every year? Even if you are now applying for new credit, you should put on your calendar an annual remainder to check your credit. You’ll never know until you look if you’ve been the target of identity fraud, or if one of your current creditors made a mistake. I’ve seen too many applicants with perfect credit get hammered because their former utility had a final gas or electric bill that wasn’t paid prior to their move here, or the cable box wasn’t returned. It’s a rude shock thinking you have an 800 credit score, only to find out it dropped 100 points because of a $45 utility bill collection account.

The website to get your free credit report is https://www.annualcreditreport.com/.

Your free report won’t have your credit scores, but it will show all the activity and history of all your accounts. If you do see an error, don’t immediately dispute the information. It is better for you to contact the creditor first to get them to fix the error. Disputes will only create issues when lenders pull your credit report. You can’t have any disputed accounts when applying for a mortgage.

Once you have begun the mortgage application process, Do Not Apply for Any Additional Credit. You may get excited and want to order some new furniture for your new home, but don’t. Lenders will pull an updated credit report prior to closing just to make sure nothing has changed. It would be a terrible shame to run into problems at the very end because your new purchase pushed your monthly obligations over the threshold of what your income supports.

Life isn’t always perfect and sometimes a car dies, or the refrigerator expires, and you must replace it ASAP. If this is the case, and you are in the middle of your mortgage transaction, contact your lender PRIOR to making that new purchase. Your new expenditure may be okay, but the sooner your lender knows, the better. They can at least tell you what documents to get them right away to avoid delays.

There’s a common thread in all the suggestions above: Prepare Early and get ahead of things. I cannot emphasize enough that with just a small amount of planning and forethought, your transaction will proceed with remarkable ease. There will be one thing missing if you do as I suggest – there won’t be any stress.

When you are in that 3 to 6 month window prior to entering into a mortgage application, seek out the lender you wish to use and ask them for their required list of documentation. It’s also at this time you’ll inquire about down payment options and the various loan programs that will meet your objectives.

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