What to do to apply for a mortgage

You don’t have to be a first time home buyer to wonder what needs to be done to apply for a mortgage.  If you haven’t owned a mortgage before, the application process may seem like a mystery.  If you have, some of the rules have changed.  They are going to change again after the first of the year.

Particular lenders may not need everything mentioned here, but it would be safe to assume that they will.  So build a file to collect all the documents and information.  

1. Credit self check:  They say knowledge is king and it is no less true here.  About three months before you apply for a mortgage, find your credit score and detailed history online with one of the many online services.  Check for erroneous information on the report, or items that are more than seven years old (10 with bankruptcy).  This will give you time to challenge the report and get the corrections made before you apply for a mortgage.  Keep all the paperwork in case the lender asks about it.  

2. Income: Roundup three years of income tax returns and W2s as well as pay stubs for the last three or four months. Most lenders will only require two years of tax returns.  With three years, if the loan officer wants more information, you are ready.  It is also the same with pay stubs, have three or four months worth instead of just two.  A year to date profit and loss statement might be required if you are self-employed.  

Keep the file up to date.  As the weeks progress, add the new documents, even after approval.  When you finally settle on a home and return to the bank, the lender will want to see an update on all documents.

3. Debts: Make sure all of your debts are listed and documented.  When the lender pulls your credit report, they will most likely find all of them.  It is up to you to provide account names and numbers, the amount owed and the what the monthly payment is on each account.  Remember to include not just credit cards, but car loans, student loans and other mortgages.  Have at least three months statements for each and, again, keep the file up to date.

4. Assets: Lenders love to see assets.  In this case, the more the merrier.  Pull together the last three statements for such things as retirement accounts, stock brokerage accounts, mutual funds, savings, checking, etc.  Don’t forget other property, business holdings and rental properties that you may own.

5. Gifts:  Many people receive money from family and friends to help them pay for a new home.  Lenders have less problems with that if it is a gift and not a loan.  Any money that shows up in your assets 60 - 90 days before appling, such as savings and checking accounts, document.  A letter from the provider that it is a gift and not a loan is the first step in documentation.

6. VA Loans: A Certificate of Eligibility (Form DD 214) is need if you are applying for a VA loan and not currently in the military.  For those that are still active, a letter from your commanding officer is needed.  

7. Divorce: Child support and alimony should be reported as income for the recipient and a debt for the provider.  Qualifying documents need to be provided on both sides.

8. Bankruptcy: Sometimes you can get a mortgage two years after bankruptcy if it is caused by a hardship such as a job loss or medical emergency.  That is, if you have establish good credit since.  Lenders require that all the documents for the bankruptcy be fully disclosed.  

9. Foreclosure: After a foreclosure you will need to wait at least two years and maybe as many as five before a lender will approve a mortgage.  Longer if you “walked-away” from a home loan.  As with other issues, lenders will want full documentation.

11.  Approval:  When you are approved, the lender should do two things.  First, they should issue a letter or memo stating that you are approved for a loan with the maximum amount indicated.  (When making an offer, have another stating that you are approved for only the amount of the offer.  But, that is for another blog post.)  Second, they should provide a good faith estimate of the cost of the loan and the worst case estimate on the closing cost.  This part is important.  Not only do you need to come up with whatever the down payment is at closing, you also need to come with cash for the closing cost.

11. Finally: Once you are approved, and have the letter from the bank, don't make any changes in your financial situation until you close on your home.  Don't purchase a car, take out another charge card or run up a balance on another.  Of course, unless an emergency comes up, then document it.  Any changes might just mean that you will fall out of formula and need to start over, or worse, get denied.

This is not a complete explanation of the application process.  There will be many things that come up that are specific to your individual situation.  But, the outline provides you with a great start to a both nervous and exciting time.

Morris Hagerman is a local real estate agent with Real Estate One in Royal Oak, Michigan.  He serves Berkley and the other Woodward 5 communities, including Ferndale, Pleasant Ridge, Royal Oak and Huntington Woods.  Hagerman is also a member of the Berkley/Huntington Woods Area Chamber of Commerce.  You can contact him by phone at 248-854-8440, email at morrishagermanproperties@gmail.com or visit his web page.