When a mortgage lender is deciding whether to grant you a loan, he or she is going to ask a lot of personal questions. Your lender will want to know everything about your financial situation and will want to examine in detail documents like your credit report, bank statements, tax returns and pay stubs.
It is natural to feel uneasy about handing over so many documents that are normally reserved for your eyes only, but rest assured it is completely normal for lenders to request all of this paperwork before approving your loan package.
While mortgage lenders have always needed information about homebuyers' financials, it is only recently they have begun collecting such an extensive amount of paperwork. This change is due to a the recently implemented Qualified Mortgage rule, a regulatory mandate that entails a more stringent screening process.
The Birth of the Qualified Mortgage
In January 2014, the Consumer Financial Protection Bureau introduced the Qualified Mortgage, a loan category that requires lenders to make an increased effort to ensure borrowers will be able to pay back their loans.
Forbes contributor Mark Greene explained if lenders follow this "ability-to-repay rule" and demonstrate they did everything they could to determine a borrower was reliable, they won't have to buy back the loan even if the borrower defaults.1 The more proof a lender has that he or she did everything possible to make sure the borrower was in good financial standing, the more protected that lender will be.
While the QM rule is in many ways designed to protect the lender, it will also protect you, the homebuyer. The more diligent a lender is when assessing your loan eligibility, the less likely you will find yourself stuck with unrealistic loan terms that you cannot meet. When a lender asks you to hand over all of that paperwork, he or she is making sure you don't find yourself in a situation where you cannot make the monthly payments.
In essence, the Qualified Mortgage is a way for the CFPB to make sure lenders are not giving out loans they shouldn't be, which protects the buyer, the lender and the housing market as a whole, as Greene reminded readers that too many bad buybacks can cause a mortgage collapse.
Qualified Mortgage Requirements
According to the CFPB, Qualified Mortgages cannot have loan terms longer than 30 years and cannot involve negative amortization, a situation in which the amount owed increases because a borrower is only making payments toward the principal and not toward interest.2 They also cannot include balloon payments, which are bigger payments made when a loan is reaching its end, or a period in which the borrower is exclusively paying interest rather than contributing payments toward the principal. In addition, QM loans place limits on a borrower's debt-to-income ratio as well as the amount of points and fees a lender can charge a buyer upfront.
It's okay to provide a trustworthy lender with private financial information. In fact, it will help you get the right loan.
What Your Lender Will Probably Ask For
The following are typical documents a lender will require a potential borrower to provide, especially if that lender wants to issue a Qualified Mortgage:
- Bank statements from the previous two months
- Your last two tax returns - if you own a business, you'll need to provide your personal and business returns
- Assets - so a lender knows you have money to fall back on in the event of an emergency
- If you're a renter, canceled rent checks or your landlord's contact information - so a lender can find out if you reliably pay your rent
- A gift letter from anyone who gave you money to help cover the down payment or closing costs stating they do not expect you to pay it back
- 1099 forms if you are self-employed
- Credit report
- Pay stubs to prove salary
- Photo identification
When you provide financial statements, it's important to include every page, even blank ones. It's possible there is more paperwork your lender will ask for beyond this list, depending on your specific situation.
Realtor.com told borrowers not to be surprised if their lender gets a bit personal and asks questions like whether you're involved in a lawsuit or about the terms of a divorce.3 These kinds of situations can substantially affect a borrower's financial standing, so it's important for lenders to know about them. They won't ask about the personal issues that led to your divorce, but they will ask about what kind of money and assets with which it has left you.
Remember, all of this is to make sure you get a mortgage you can pay back. Your lender is working hard to give you a mortgage with the best terms, so don't be afraid to be open. Doing so will help you in the long run.
2Consumer Financial Protection Bureau