Considering refinancing or buying a home? UNPLUG YOUR SHREDDER!

2013-06-15_0831_001If you are like me, you probably shred just about any documents that has your personal information on it…it’s just habit or second nature. I often sort through my mail right next to our shredder.  If you are considering buying a home or refinancing your current mortgage, this is a practice you will need to reconsider.

The mortgage process will require that you provide all sorts of documentation.

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Changing jobs during the mortgage process

Sometimes an employment opportunity may become available while you’re in the process of buying a home or refinancing. Lenders are looking at a borrowers employment and income stability so depending on the type of field you’re in, a change of employment may or may not impact your loan approval. 

As long as you’re staying in the same line of work and if you have an annual salary, it probably won’t be an issue. The lender will probably require at least one pay stub (possibly more to document your income) from your new employer as well as a verification of income. If you have an employment letter or contract from the new employer, this can be helpful to provide the lender as well. With new employment, signing bonuses are not factored into the annual income however, they may be used towards the down payment or closing cost as your seasoned funds. 

If the new employment is not related to the same line of work, this may cause an issue with the loan approval as lenders are looking for two years of employment in the same or related field. If the income structure has changed, this may cause an issue as well unless it is to an annual salary. The underwriter may require a written letter explaining your employment history.

Moving from annual salaried income to a potentially flexible type of income may derail your loan approval. Self-employed, hourly income, bonus or commissioned income requires a two year history before a lender can use it for qualifying purposes.

Sometimes a promotion can impact loan approval if pay structure changes. For example, if a borrower was paid an annual salary and then receives a promotion which reduces the annual salary in exchange for a higher bonus or commission structure, the bonus or commission income cannot be used unless the borrower has been receiving that type of income for a minimum of two years. In this case, the new lower base salary (the “guaranteed” portion of the income) can be used, but not the “flexible” bonus type income. 

If you are considering a job change during the mortgage process, it’s crucial to inform your mortgage originator as soon as possible. Your loan application needs to be updated and the lender will be doing a verification of employment prior to funding your mortgage.  

If you’re considering buying or refinancing a home anywhere in Washington, I’m happy to help you!

How often will I have to supply documentation for a mortgage?

OnionI've often thought that the loan process for a borrower is similar to peeling an onion. At the very beginning stages, when a borrower is considering obtaining a mortgage and they discuss their scenario with their mortgage originator, they appear to be a smooth, shiny Walla Walla Sweet. As the process continues, more layers are removed as documentation is provided. Sometimes when several layers have been peeled away, you no longer have an onion or at least, not the one you originally started with. It's crucial that a mortgage originator takes an in-depth interview with their clients before they enter into a transaction (purchase or refinance) to make sure as much their financial information has been addresses as possible. There may be a significant difference between how a borrower views their financial scenario and what their supporting income and asset documents tell to an underwriter. 

Here are some of the stages that a borrower can expect to have documentation requested by their mortgage professional:

Preapproval. A preapproval is different than a "prequalification". When you're preapproved, expect to provide income/employment and asset documentation to support the information you've provided to your mortgage originator. The items that are requested may be standard or specific if the mortgage originator used an "automated underwriting system" (AUS).  NOTE: if you have not provided any supporting documentation to your mortgage originator, you probably have not been "preapproved".  It's possible that if it's been a while since your mortgage was preapproved, you may need to provide additional information (recent paystubs or bank statements, for example) to update your preapproval.

Processing. Once you have a bona fide transaction, your loan application is "in process". At this time, my Processor will review my clients file with a fine tooth comb to see if there's anything I may have missed. It's possible at this stage, that a borrower may be asked to provide additional documentation. Depending on the loan program, sometimes longer time periods are required (30 days of most income documents or two months most recent paystubs, for example). This is also the stage when IRS tax transcripts are pulled (from your signed 4506T) which may also trigger questions and the need for additional documentation. Our goal is to provide a solid file to our underwriters so the end result is less "conditions". 

When your appraisal comes in you will be required to sign disclosures acknowledging you received a copy of your appraisal. By the time you're done autographing all of your paperwork required in a mortgage transaction, you may feel like a very popular rock star.

Underwriting. Once we have a complete loan package with all of the supporting documents, the file is submitted to our underwriting department. Once again, the transaction is being closely reviewed to make sure the documentation provided is in-line with the program guidelines and lender overlays. Once we have preliminary approval from underwriting, it's normal to have some "conditions" which typically means…yep, you guessed it, providing more documentation or writing a letter explaining a specific circumstance (LOE). 

There are primarily two types of conditions from underwriting:

  • Prior to Doc: these items must be provided before loan documents can be prepared.
  • Prior to Funding (or Closing): these items will not hold up your loan documents being prepared and can be provided prior to your loan closing.

Prior to funding, your employment is re-verified and a soft pull on your credit report may be done to verify you do not have any new debts and that you are still employed. If there are changes to your loan application (new debt or employment) be prepare to provide more documentation. If you've made changes to your application (debts, assets, income or employment) during the transaction – you must notify your mortgage originator. You're signing a "final" loan application at closing which needs to reflect your financial scenario – if it does not, you may potentially be commiting fraud. In addition, when changes to an application are found at this late stage in the transaction, it's probable the closing will be delayed.

Every time a document is provided to underwriting for review, it's possible it may trigger a new condition.  For example, a bank statement may disclose large deposits, which will need to documented where the source of funds came from or it may show the borrower has bounced checks, which could require a written letter explaining why the NSF happened. 

Why all this documentation? Basically, it's thanks to recent years past with the mortgage meltdown and fraud. Providing everything that is requested by your mortgage professional will help expedite your transaction. 

The days of "stated income" loans are gone. There are some streamlined mortgages that allow for less documentation, such as an FHA streamlined refinance and HARP, depending on the automated underwriting response from Fannie or Freddie.   

If you're interested in getting preapproved for a mortgage for a home located anywhere in Washington State, I'm happy to help you. I have been helping Washington home owners at Mortgage Master Service Corporation buy and refinance since 2000.

Photo Credit: Doc Wert via Flickr

5 Ways to Derail Your Loan Approval

MonorailYou’re getting ready to buy a home or refinance your home with your closing day around the corner when your mortgage originator contacts you to let you know there may be a problem.  Some issues may not revealed until days or sometimes weeks into a transaction.  Anytime documentation is provided to the mortgage company, it has the potential to raise more questions or require more documentation to satisfy underwriting guidelines.   Here are five situations to be aware of that can cause headaches during the loan process.

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Do I Really Have to Provide All Pages of My Bank Statements?

A fisheye image of a mid-30's business woman pouting and looking angry.

A fisheye image of a mid-30’s business woman pouting and looking angry.

When assets are being used for down payment of a new home, towards closing costs on a refinance or even to document that the borrower has enough reserves (typically a couple months of mortgage payments) in the bank after closing; they need to be documented.

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What is required of income documentation for a “full doc” loan

Last night, someone contacted me with excellent questions regarding buying a home priced over 1,000,000.   His questions are excellent and worthy of answering on a post to share with other readers.   Since the answers may be a bit detailed, I’ll break this up into separate posts.

“I was wondering if you can provide me with some information regarding loans.  We are looking to buy a house in the next 6-12 months with a price range of 1.1 million to 1.3 million.  We plan to put 20% down on a 30 year fixed mortgage and our credit score is between 760-790. 

1)  What type and duration of income documentation is needed for a full doc loan in the current lending environment?
2)  What is the debt to income ratio that most lenders are using for loans of this size?
3)  What is the typical interest rate differential for a loan of this size compared to the jumbo rates that you quote on Rain City Guide?”

The short answer is 2 years of annual income documentation and 30 days of paystubs.  Income requirements for a conforming and non-conforming are essentially the same and depend on what the automated underwriting system’s (AUS) response is.  Underwriters are looking for trends in income and if they spot what they determine to be a downward trend, they will make an issue of it. 

Here are some basic guidelines that you can rely on which vary depending on how one is paid and if they are self employed.  

Annual Salary

Underwriters like to see two years in the same line of work.  College courses in your line of work can be included in your two year history.   Be prepared to back it up with transcripts which may or may not be required. 

If you’re paid an annual salary, plan on providing 1-2 years of your W2s and paystubs documenting 30 days of income showing your year to date earnings.   Often times, just one W2 is required; it all depends on the AUS findings.

Bonuses, overtime and commissions are typically averaged over the past two years.  If you are relying on this type of income to qualify, you may need to provide your last two years complete tax returns.   A Verification of Employment may also be sent to the employer with a request to provide your income information.   If tax returns are provided, the lender may require you to sign a 4506 or 4506T.  If a borrower has not received bonuses, overtime or commission for the past 24 months; it may not be used for qualifying for a mortgage.

Hourly Employees

When you are paid hourly and the hours vary, your hours and income are averaged for the past two years.  Be prepared to provide your last two years W2s and paystubs covering 30 days of income. 


Self Employed

Two years complete (all schedules) business and personal tax returns are required for a full doc loan.    This is the “short answer” and I promise I’ll do a follow up post what may be needed to document self employed income.   A key factor is that you must be able to document that you have been self employed for two years and this income is averaged.   Again, underwriters are looking for trends.  If your most recent year shows a less income than the previous, this will be questioned.

Other types of acceptable income may include:

  • Military
  • Income from rental properites (not for renting rooms in your primary residence)
  • Retirement
  • Alimony
  • Child Support
  • Interest income
  • Part time employment/second jobs
  • Disability/Social Security

As long as the income can be documented for the past two years and is likely to continue, it’s likely that it can be used for qualifying purposes. 

During these times in the mortgage industry, guidelines are constantly changing and underwriters may lean towards the more cautious side.  If you’re planning on obtaining a mortgage for a new home purchase or refinance, the earlier you meet with a Mortgage Professional to review your options, the better off you may be…especially if you’re in the non-conforming market (loan amounts over $417,000).

Watch for Part 2 where I answer Questions 2 and 3.