The Absolute Doctrine for Obtaining a Home Loan

Today, due to the Patriot Act*, the Mortgage process is required to account for "where the funds come from." Believe it or not, before the Patriot Act it was common practice for terrorist and criminals to "launder money" by bringing unexplained funds to closing. This practice has been stopped by the Patriot Act; BUT the unfortunate part is that now, Every. Single. Piece.  Of. Paper. has to be documented. EVERYTHING. It is a tedious process for you; one that requires patience and tenacity on your part  (and your loan officer’s). 

Get PRE-QUALIFIED BEFORE you put a home contract in place.  It will make life so much easier.

BE LIKE A BOY SCOUT AND BE PREPARED!

  • Have your documents ready! No matte what kind of mortgage you get, you will need:
    • Most recent 2 Years Personal Income Tax Returns (signed) and W-2's
    • Most recent 30 Days Paystubs
    • Most recent 2 Months Bank Statements, Retirement accounts, Stock accounts, etc. 
  • Please have ALL pages of the above ....if it says on the statement 1 of 6...you should have ALL 6 pages.
  • If you have bonus income or commissions, a two year average will be done if it is increasing. If it is decreasing only the last 12 months will be used as long as your employer verifies in writing that it will continue in the future. 
  • If you have filed a Tax Change with the IRS tell us about it. It requires us to have you signs a different tax transcript request form!
  • If your employment status changes before the loan closes.....let us know immediately!
  • If you own 25% or more of a company,  the loan officer will also need:
    • Past 2 years Business Tax Returns
    • Current Year YTD Profit and Loss Statement (unaudited) from the Business
    • Current Balance Sheet (unaudited) from the Business
  • Keep all paystubs and account statements to update your loan officer.

 

CREDIT....CREDIT...WHO HAS THE CREDIT!

  • Most important...pay your bills on time!
    • Don't bounce checks, even if you are paying for Bounce Check protection...it looks bad to underwriters. In some cases, more than 2 overdrafts A YEAR will cause a loan denial by underwriting. 
    • Don't open new credit accounts if possible. Try to keep your credit pulls by vendors to a MINIMUM. DO NOT go car shopping until AFTER you purchase a home! (All car dealers pull your credit when you take a test drive without your knowledge) Also, do not buy automobiles, planes, trains, lawnmowers, washers, dryers, refrigerators, furniture, etc...
    • Do not use your credit cards excessively or let your current accounts fall behind.
    • If you have old liens or old collections...inform your loan officer. Sometimes paying them off can HURT your credit scores for the short term.
    • If you have a debt that is being paid for by someone else or a company (cosigned car loans, etc.), the last 12 months cancelled checks to prove this will be required, so that it can be taken off of YOUR debts! PS....they can never have been paid late either.
    • DO NOT DISPUTE any accounts on your credit report officially. If you have some that are listed as open disputes already, you have to contact the credit bureau and have the disputes removed. Mortgage loans with open disputes on your credit cannot be closed. 
    • Credit scores that a mortgage company gets are different than what you see if you check your own credit. Credit Bureaus weigh things differently for mortgage companies than they do for credit card companies and your own viewing, so don't be surprised if the scores are different. If you subscribe to one of the credit monitoring companies, be aware that the scores you see ARE NOT mortgage credit scores. Do not be confused by these scores. They have nothing to do with your mortgage loan approval.
    • Credit Management Companies (where they pay your bills for you) are viewed just like Bankruptcies. Stay away from them!
    • Your credit report is good for 120 days from the date it was initially pulled.

 

Do Not’s

  • Do not co-sign a loan for anyone.
  • Do not spend money that you have set aside for closing.
  • Do not omit debts or liabilities from your loan application.
  • Do not make large deposits without checking with your loan officer.
  • Do not change bank accounts during the loan process.
  • Do not “forget” that you pay child support.
  • Do not transfer funds back and forth between your accounts.
  • Do not close any current accounts
  • Do not use your debit card excessively (paying for meal after meal; small items, etc.)

 

LOVE AND MARRIAGE:

  • If you plan on getting married BEFORE your loan closes please, please, please let your loan officer know! It is not a problem BUT it needs to be noted.  
  • If, on the other hand, you are divorced...your loan officer will need the divorce decree and Child Support documents (if applicable) (all pages) as it will become part of the “loan docs.” Child support and Alimony payments must be received like clockwork to be able to be counted as income (no skipped months or partial payments)....AND you must have been receiving it for at least 6 months!
  • If you are in the "GRAY" area of "Separation"....it is a gray area for mortgages too.  A signed "Marital Separation Agreement" which has been executed by the courts (signed by a judge) will need to be provided to your loan officer. 

 

"SHOW ME THE MONEY" --- ASSETS, RESERVES and DOWN PAYMENTS

 

401k

  • If you are using 401k proceeds for any part of your down payment, the request for funds need to be made no later than 60 days prior to closing.
  • Loans that you have (or will have) that are borrowed against your own assets like 401K loans or stock portfolio loans are NOT counted against you in debt calculations. Those loans must be secured against those assets and not be unsecured to not count the debt.
  • Retirement 401K funds can be used as reserves but a document from your plan (or employer) stating that you can withdraw the funds in case of financial emergencies will be required. 

 

Gift Funds

  • A gift from another party, notify your loan officer immediately as additional documents are required and can take several days to get all of the required additional documentation from the donor together.
  • Assets (MONEY) used for closing can be your own money that is in a bank, gifts from a relative, cash taken from a retirement plan or borrowed funds from a retirement plan (401K).
  • Use a personal check from your own account for earnest money and upgrade deposits. Cash gifts ARE NOT acceptable. Any money used not from your earned income has to be sourced and documented.
  • If you are using a check FROM ANYONE OTHER than your account, consult your loan officer first. This has to be documented and the papertrail created. 

 

MY KINDGOM FOR A CASTLE!

  • Today you can have up to 10 homes financed at the same time with a Fannie Mae loan. Only one can be your primary residence and the rest can be second homes or investment properties. Second Homes and Investment Properties require a bigger down payment.
  • When you own other properties beside the subject property, taxes, insurance and HOA dues as well as mortgage payments on each home as it is factored into your DTI AND has to be documented with a paper trail. 
  • If you own property outright with no mortgage on it, a title search will be performed on each  property to show there are no liens (and payments) against it that do not show up on your credit report...like from a private investor.
  • When you have multiple properties, there may be reserve requirements on each property depending on the type of loan you are getting.
  • If you are planning to move out of one home and rent it, you must have 30% equity in the home before the new rental income can be counted in your debt calculations. This will require an appraisal on the home you will be renting to prove the value.  You will need to be prepared to pay for the appraisal. 

 

INFORMATION BEGATS INFORMATION: DOCUMENT!-DOCUMENT!-DOCUMENT!

  • Down Payment Funds must be from earned income from work or a gift. Loans ARE NOT an acceptable down payment.
  • Paychecks advances/loans ARE NOT acceptable and are usually reflected on bank statements.
  • Money received from student loans CAN NOT be used as a source for the down payment.
  • When it comes to your Down Payment, with government loans (FHA & USDA) the funds can come from bond money like Memphis/Shelby County DPA or THDA Bond funds. Many of these have income and/or housing location limits.
  • Be prepared to provide cancelled checks for all money paid to the realty company and/or the mortgage company.
  • Keep the Confusion to a Minimum! Please do not transfer money between accounts if possible while in the mortgage process.
  • Credit Card Advances or any other unsecured loan is NOT usable in a mortgage transaction.
  • CASH is NOT KING! Mattress money (CASH) can't be used in a mortgage transaction or for reserves. Get it in a Bank several months before applying for a home loan!
  • BEWARE OF NON-WORK DEPOSITS. These days any deposit that are not work related, have to be documented with cancelled checks, explanation letters, and a Bill of Sale (if proceeds are from something that is sold). 
  • Always keep in mind...."Complete Paper Trail"! If you get a hard check from work that is not directly deposited, PLEASE deposit it first THEN take cash out of your account afterwards.
  • A copy of the paid Down Payment Check (front and back of the cancelled check) will need to be provided ASAP to your loan officer.  
  • PLEASE...PLEASE...PLEASE write the down-payment check out of your own bank account. If need be....it can come from a GIFT from a relative. However, it will be the source of the funds has to be documented. This means that your relative will have to provide documents of WHERE the money came from.  This is to ensure that it is not “a loan.”  I.e. that your relative did not borrow money to give to you.  
  • Talk to your home insurance agent BEFORE you put a contract on a home. Make sure you have an idea what the home insurance rate will be. Sometimes location can cause different rates if in a rural versus urban area.
  • Obtain homeowners insurance 3 days of application and have your insurance agent contact your loan officer.
  • Often when you supply information to a loan officer, it can lead to the need for more documents. A case in point would be a bank statement that has other non-work deposits would lead to the need for additional documentation.
  • When you are asked for documents...Get them back within 24 hours! Delays will slow your loan process.
  • If you are moving out of a rental property make sure you provide your forwarding address and promptly pay all of the final bills due from, light, gas and water, cable, etc.
  • During the mortgage process, you cannot change jobs, become self-employed or quit your job and notify your loan officer immediately if any changes occur in your employment status and/or income. (Increases or decreases)

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Final Note of Explanation:

In October, 2015 The Consumer Financial Protection Bureau (CFPB) put into place layers of rules in today’s mortgage market place which is governed by various institutions and government branches.  These rules have made the process of obtaining a loan particularly arduous, stringent on the borrower, and a compliance nightmare for the loan officer and Mortgage Company. You are not being asked to provide documents “just because.”  Mortgage companies and appraisers have incredibly tight guidelines that they must follow.  Consequently, the borrower must comply with the documentation paper trail which is non-negotiable. 

*The USA PATRIOT Act is an Act of Congress that was signed into law by President George W. Bush on October 26, 2001. With its ten-letter abbreviation (USA PATRIOT) expanded, the full title is "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.”

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In giving “credit” where “credit due,” this document was not created solely by me.  It is a compilation of several different sources found in various blogs, emails, articles and/or personal experience with various client situations as my Mortgage Officer and I have traveled the Road of Home Dream Creating for our clients.  If you are the author of any parts of this information, please email me so that appropriate credit can be given to you. For now, Kudos to you!