Get the information to make the process easier
When John Witkowski moved to Wisconsin in 2018, he felt confident that he'd be able to handle the mortgage application process. After all, just five years earlier, he was approved for a 30-year, fixed-rate jumbo mortgage for a gorgeous colonial on two acres in New Hampshire.
But, according to Witkowski, this time around the process was more challenging. The lending environment had changed and lenders required more documentation than in the past that outlined income, assets and other financial information. "To clearly show and trace your income, you need all financial information readily producible to speed up the process," he says.
Luckily, there are ways to make the mortgage process easier. By partnering with a lender and carefully preparing yourself, you can streamline your lending journey—and speed up the path to your new home. Here's how to get started:
Step 1: Gather your papers
The first step to getting a mortgage is getting your paperwork in order, says Michele D. Hammond, a Chase Private Client Home Lending Advisor. She suggests following a “two-by-two-by-two system," which involves gathering your two most recent pay stubs, tax returns, W-2s from your employer, and bank statements from all of your savings and checking accounts. You'll also need to provide a 4506-T form—which the lender can use to verify your income with the IRS—and your signed home purchase contract.
To avoid delays and remain clear and transparent, provide evidence of all forms of income. If your role includes a bonus, include documentation to verify it. If you collect rental income, share a Schedule E (Form 1940) to show profit (or loss) from real estate along with any income statements.
Converse with your lender, and have them tailor your check list.
That's the basic checklist, but this is a situation where one size might not fit all. If you have additional needs or questions, don't be afraid to ask for help. “Talk with your lender, and have them tailor your check list," Hammond suggests.
Step 2: Track the details
Hammond notes that how you earn your money could change the paperwork. For example, if you work hourly, part-time, or are paid weekly, you'll need four pay stubs, instead of the usual two. For added transparency, self-employed applicants require two years of tax returns and their most recent profit and loss statement to show their revenues, costs, and expenses during a fiscal year.
Witkowski warns that imprecise language can cause hiccups. When he referenced "my company" to describe investments at the start-up where he works, the lender thought Witkowski owned the company. It took time to clear up that misunderstanding.
Witkowski also found that it was hard to access some of his financial records, such as account statements, online. To prevent identity theft, many banks don't display account numbers on records. “It takes time to gather all the material," he recalls.
Step 3: Test your mortgage fitness
When it comes to determining if you're fit for the loan you want, lenders assess four main factors: income, credit score, assets and collateral.
Often, Hammond says, clients omit information or claim earnings that don't match their tax return.
"When a client can't produce the correct return, we must qualify with what the IRS presented," she explains. If the IRS' records cite a lower income, it can make the applicant appear less fit—and can disqualify them from getting the loan rate they want.
Your credit score can also impact your loan fitness. To build up your score, ensure you pay things on time. Also, to avoid unpleasant surprises, be sure to request a free report through a credit bureau before you apply for your loan.
Your assets can also affect your down payment. Lenders will want to know where the money comes from. Is it inherited money? A 401K? Other collateral? Will you live in the home or rent it out?
Hammond recommends thoroughness. She's found that, when a client forgets to mention something vital—like co-signing a lease on an apartment for a friend—the omission can reduce the amount the bank will approve for their mortgage.
Step 4: Get in top financial shape
Now that you've gathered your necessary paperwork, strive to improve your financial profile. For best results, Hammond suggests working with a lending officer. Additionally, the following tips could help:
- Hold off on changing jobs: Lenders look for job stability when they evaluate your ability to repay your loan. If you must switch jobs while applying for a mortgage, be sure that your new base salary qualifies you for the same loan amount. And keep in mind that only your base earnings count toward your income, until you can produce at least, two years bonus history.
- Avoid carrying excessive debt, student or other: Your debt-to-income ratio is an important factor that lenders consider when looking at your fitness for a loan. Reducing debt can make your finances look more attractive.
- Eliminate any unnecessary monthly expenses beyond housing: You can use the additional money to pay down debt or increase your down payment, both of which could put you in better shape when it comes to applying for a loan.
- If you need to build your credit history, try making frequent payments on a small credit card: "If you pay on time and consistently, your score should reflect that," Hammond says.
Follow through on these core steps, and you'll be well on your way to applying for your mortgage—and getting your new home!