HOW DO I SECURE A LOAN?
Preparing to Secure a Loan Checklist – Documents a Lender Will Need
Documentation, documentation and then some more documentation. In an effort to get ahead in the process, it’s a good idea to have the following docs accessible and ready to provide to your lender for the loan application. The information below is very standard of what the loan team will request. Not all will apply to you, only focus on the items that relate to your own personal finance situation. Pulling these documents together helps you get ahead of the game! I recommend for my clients to keep this information updated on a secure share drive or folder on your PC throughout the house hunt process and just make it a habit to put the latest statements into the folder. That way, it is always up to date and ready to go once you find your place!
- W-2: 2 Years
- Tax Returns: State and Federal
- 2 years with all schedules. If self-employed, own rental properties, or receive investment income
- K-1’s, Partnership Returns (1065’s) and/or Corporate or S-Corp Returns: 2 years
Work History Info:
- Paystubs: 1 month, most recent
- YTD Profit & Loss Statement: if you are self- employed/independent contractor
- 2 months, most recent Bank/Asset(s). Include:
- Savings, Checking, Money Market, Security Brokerage Accounts
- Retirement Accounts: IRA, 401K’s
- All pages of statement required, not just summary page
Current Mortgage Holdings:
- Rental Property: Copies of leases
- Current Mortgage Statement: Copy of all including rental properties
- Home Owner’s Insurance: Declaration page, all properties including rentals
- Driver’s License or Passport: Copy
- Non-US Citizens: Copy of resident alien card; resident alien application or H1B or L1 Visa + Passport
Tips on Keeping Your Financial House in Order to Secure the Best Loan:
Paper trails are very important to lenders/underwriters in the lending approval and funding stages. It’s best to try and keep your credit in a ‘freeze frame’ as much as possible not only during your house hunt, but actually before you even formally start the house hunt! Basically, underwriters want to see consistency so the longer your finances and accounts have been intact, the better picture you paint for an underwriter. As an example, it may seem like a good idea to consolidate the funds you will use for your down payment into one account so you can wire from one account. But, it’s actually better to wire funds from the original accounts even if it means 10 wires vs. 1. Your loan broker will be able to help coach you on how best to approach anything as it relates to your credit during this period. They can provide guidance to best keep you on target to securing a loan.
- Avoid moving money around from one account to another
- If you need to move money, establish a paper trail of the outgoing and incoming funds
- Gifts, Bonuses etc, need to be sourced by making a copy of the check and deposit receipt or wire transfer
- Avoid making large purchase(s) on credit
- Avoid your credit being run
- If you do have your credit run the credit inquiry needs to have a signed letter explaining whether or not any new credit was obtained as a result of the inquiry
Do NOT Close Accounts:
- Do not close any credit card accounts or credit lines
- Avoid changing jobs, especially if you are in escrow
Loan Limits & Definitions:
There are many loan products available, from 30 year fixed to 3/5/7 year ARMS to 80%/10%/10% to portfolio loans, just to name a few. You will hear a lot of terms thrown around, below are basic limits for a few of those products. A loan broker will bring clarity to the portfolio of options available to you.
- Conventional: Up to $417K
- High Balance Conforming: $417,001 to $625,500
- Jumbo/Super Jumbo: $625,501 and above
Debt to Income Ratio (averages):
- As a general guideline, lenders will look at your debt to income ratio and on average want to see it at or below a certain percentage. There are different types of loan products with different debt ratio requirements. A good baseline to be at is a 40-45% debt to income ratio.
Debt is defined as:
- Debt = PITI + HOA + All Personal Debt.
- PITI = Mortgage Principle, Interest, Taxes, Insurance
Your credit score is important, the higher the score, traditionally the better the loan rate. Below is a basic framework of scores and rates.
- Scores under 620 are typically considered sub prime
- Improved rates: 720+
- Best rates: 740+
- Lenders take the lowest middle score of 3 agency scores.
- If you are purchasing with a partner, the partner with the lowest score is the number used for the mortgage qualification
Don’t clear out all your funds to buy a home, you will need reserves to cover your mortgage should you experience financial hardship. It’s a good idea to have a emergency fund available
- Amount in the bank after COE (close of escrow)
- Varies by lender, however the larger the loan the larger the reserves required
- A good benchmark to use is, 3-6 months PITI (principal, interest, taxes, insurance)