What Will Your Lender Want To Know?

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Okay, you've found that dream house, now how do you get it? Few people can afford to pay cash so somewhere, somehow you have to get financing. Be prepared BEFORE you talk to a lender. Also, plan on talking to more than one lender. There are so many financing plans, interest rates and options available today that you really should do your homework, even before you start looking for a new home.

Be prepared with the following information:

  • Cash available
  • Income
  • Bank Account Records
  • Employment Specifics
  • Tax Records
  • Real Estate Owned/Rented
  • FHA/VA Documentation
  • Credit Cards
  • Car Loan(s)
  • Mortgage
  • Personal Loan(s)
  • Gift Letter
  • Social Security Numbers
  • Assets

    Phew! That may not even be a complete list! Click on any of the above categories for more information. Anything you can think of that will demonstrate your ability to repay the mortgage can help convince a lender to make the loan. Realize that virtually all lenders have a scoring system to make the decision whether to lend you money or not. Do not omit vital information, like "forget" to mention a loan. If the lender's computer "thinks" you are trying to hide debts, you will almost automatically be denied credit. Be honest!

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    Cash Available

    Although there are some instances where you can buy a house with no money down and no settlement fees, be realistic. Unless you qualify for 100% FHA/VA financing, save some money. In most cases you will need at least 5% of the purchase price as a down payment, and several hundred to a couple of thousand dollars for assorted closing costs.

    So, if you are looking at a $50,000 home, figure $2,500 for the 5% down and another $2,500 for closing costs. Ask your agent for a rough estimate of the closing costs. Remember, sometimes closing costs are negotiable and you might be able to make a deal in your offer to purchase by convincing the seller to pay more or even all the closing costs. You may pay a little higher price for the house, and your down payment may be $100 or so more, but it requires LESS up-front cash.

    Your best source of down payment and closing costs is from your savings account, or equity from the sale of your presently owned home. Your worst source is to say you have it under your mattress at home, or to have a savings account that was just opened for the full amount a few days ago. The lender will want to know WHERE that money came from, and see documentation backing it up. Bank statements showing the last year's balances, steadily growing, will convince the stingiest lender that you have been diligently saving for this moment! A cash bonus from your employer is another good source--it shows your worth in more ways than one!

    For people just starting out, sometimes a parent or "rich" relative will make a gift to you for the down payment. Be prepared with a convincing gift letter clearly showing that it is a gift that does not have to be repaid, and is signed and dated by the donor.

    The more you can put down in funds from a good source, the more likely the lender will approve your loan. Also, the lower the loan amount the lower your monthly payments will be.

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    If you are a wage-earner, bring your year-to-date pay stubs AND your last two years' W-2 forms. If you do not receive pay stubs (or keep lousy records), bring a letter signed by your employer stating your gross income for the current year, indicating weekly, biweekly, or monthly pay. If you are sure to get a raise, ask your employer to state that fact, indicating how much and when.

    If you are self-employed, be prepared for a more grueling experience. Your foundation documentation will be your last 2-5 years' worth of income tax statements (see below), preferably signed by a CPA. You may also be required to show your current year's budget, income and expense statements to date, and just about anything else a lender can dream of. Unless you have a soundly established business with an outstanding reputation in the area, you may have a difficult time convincing the lender that you are a sound risk.

    Of course, if you are fortunate enough to have a guaranteed source of income, e.g., trust fund, inheritance, lottery winnings, retirement, etc., bring the documentation proving that.

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    Bank Account Records

    If you have a savings account, bring the passbook or monthly/quarterly statements showing the balance in the account for at least the past year. If you have stocks that will be cashed in, bring a statement from your stock broker (bank's trust department) specifying the stocks avaiable.

    Your checking account statements for at least the last two months should be available and, if you use your checking account as your savings account, bring the last year's worth of statements. Other bank account records could include Christmas Savings, Investment Savings, Vacation Savings or any other specialized savings account vehicle.

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    Employment Specifics

    Your lender is going to look for stability in income. Be prepared to document your employment for up to the past three years. If you have been with your present employer for less than two years, you will need information about your previous employment, at least. Changing employers may or may not be a strike against you in your application. If you have changed employers two or more times in the past two or three years, and have advanced in earinngs or even position, this should not detract from your application. Also, if you are in the trades and have worked through your union but for a variety of firms, this also should not detract.

    However, if you have unexplained gaps in employment and discontinuity from one job to the next, e.g., going to lower paying positions, you had better be prepared with a good and believeable story to explain it. Being fired (as opposed to laid off) by two or more different employers in the past few years is not a good indication of your income earning stability.

    Be ready with the following specific information (for each employer in the past three years): Employer's name, address, phone number; your supervisor's name; your position; your hourly/weekly/monthly pay; reason for leaving (if your current employer has not been your only employer for at least two years).

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    Tax Records

    Bring signed and dated COPIES of your previous two years Federal Income Tax statements. If prepared by someone else, be sure both you and the preparer have signed. If your income tax is based on supplemental schedules, do not just bring the front page of your 1040, bring copies of all pages including supplemental schedules.

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    Property Owned or Rented

    If you own (are buying) your present home, have the lender's name and address and your loan number available. Also know what the current principal balance is, and your monthly payments. If you do not know, find out if your real estate taxes and homeowner's insurace are included in the monthly payments (escrowed) or if you pay them separately.

    If you currently rent your present residence, have the landlord's name and address available, and the monthly rent payment. Know whether the utilities are included in the rent and, if so, which utilities.

    You could own and/or rent more than one property. Have all the information available for your non-principal residence as well.

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    FHA/VA Documentation

    You need to produce a driver's license to prove your identity. Also, for a VA loan, you will need a Certificate of Eligibility. This can take a couple of weeks to acquire, so you might want to start working on that early to have it available in time for your application. If not, have a copy of your DD 214 and your lender may help you apply for the Certificate.

    For FHA, contact an authorized FHA lender as soon as possible to determine qualitications and any special documentation needed.

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    Credit Cards

    If you have lots of credit cards with big balances owing on them all, you may be in trouble before you start. Assuming you have a manageable number of cards, bring the banks name and address, card type/name, account number, present balance owing and current monthly minimum payments for EACH card. The easiest thing here is to simply bring your last statement for each card. DO NOT neglect to mention ANY card you may have, even if there is no balance due. When the lender pulls your credit report, ALL cards will certainly be listed and, if you neglect to mention one or more, you may not be able to explain your way out of it to the lender!

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    Car Loan(s), Personal Loan(s), Other Debt

    For all other loans, bring the lenders' names and addresses, account numbers, purpose of the loans, secured or unsecured (if secured, by what?), balances owing and current monthly payments. If you recently paid off one or more loans, bring similar information. Your open loans show what you have to manage on a monthly basis, paid off loans show that you did manage well.

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    Social Security Number

    Obviously you will need your own Soc. Sec. No. If you are purchasing the home jointly with your spouse or significant other, theirs will be required, too. If you are using a co-signer, his/her No. will also be required.

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    This is where you get a chance to offset some or all of the debt listed in the previous paragrephs!

    If you own your present home, that's probably your biggest asset. If you do not have a reasonable estimate of its value, ask your real estate broker (you probably have it on the market and/or have an offer on it--the value is somewhere between your asking price and the offer amount).

    Vehicle(s): If you do not have a reasonable estimate of its(their) current value, a local car dealer may help. But, your mortgage lender probably also makes car loans and can help you determine their book value.

    Boat, Motor Home, Camping Trailer, etc. Although these depreciate even faster than cars, they do have a value. If you aren't aware of market values, your local dealers should be able to help. Again, your mortgage lender may also make loans on these and should be able to help you determine a fair value.

    Savings, Trusts, Inheritances, etc., have been discussed above. Any other major asset that is marketable should be listed along with its current value. Furniture and appliances should not be considered, but if you have some personal item of stong value list it.

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    4/30/99 updated Saturday, November 20, 1999