Mortgage Application Process: Key Documents and Common Red Flags
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There are not many things more crucial in an individual’s life than applying for a mortgage. Buying your first home or shifting to your dream property is never easy; it is one of those things that can give you an excitement rush or can nerve-wreck you at the same time. The center of a successful mortgage application is your ability to show financial transparency to your lender and meeting all the documentation requirements.
In this blog, we will cover everything you need to know such as the documents that are required, and other things that can cause red flags and derail your application. These components will help you submit a strong application and improve the chances for it to get approved.
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Key Documents Needed for Submitting a Mortgage Application
There is a whole list of documents that need to be provided when applying for a mortgage in order to assess the individual’s financial position, identification, and ability to repay the loan. The following is the compilation of key documents you will need.
1. Credit Report and Credit History
In order to assess your financial responsibility, lenders depend greatly on your credit history report. These are important documents that show your borrowing habits, outstanding debts, and repayment history.
Why it matters:
An untarnished credit history accompanied by on-time repayments is a good indication of your debt management skills. On the other hand, desperate credit inquiries and missed payments can be alarm bells. Before applying, get your credit report and check for any mistakes that could negatively affect your score.
2. Tax Returns and Bank Statements
Lenders will want to see evidence of income to determine your affordability for a mortgage. The following documentation will be requested from you:
- Tax Returns: The lenders will look at the last two years of your tax returns to understand your earnings. Some self-employed applicants may need extra documentation, such as profit and loss statements.
- Bank Statements: Generally, lenders will request 2 to 3 months of recent bank statements. These accounts should be active and low-maintenance, showing your saving and spending habits.
Tip: Emphasize regular funding activity and steer clear of showing overdrafts and gambling expenditures which can raise eyebrows.
3. Identity Verification (Address and Phone Numbers)
Lenders have to identify you for fraud protection purposes and ensure they can reach you, which is challenging without a phone number. You will usually need to provide proof of address via utility bills and a government-issued photo ID, like your passport or driver’s license.
4. Employment Verification
Your employment status and history can also affect your chances of qualifying for a loan. You should be ready to submit paychecks, receiving a letter from your employer, or providing a narration of your employment history, especially if you have been changing jobs lately.
Comprehending the Function of Bank Statements
Bank statements are analyzed by lenders as a means to assess your financial capacity and overall quality to determine whether you will make your payments regularly. When checking your statements, they are usually interested in these things:
1. Large Deposits
Excess deposits that lack explanation are usually flagged. If you have made a large deposit recently, ensure that you can provide supporting documents to explain the origin, such as a gift letter or evidence of an asset sale.
2. Consistent Account Activity
Consistent activity on the bank account is expected. Large, irregular activities along with too many movements to high-risk investments can negatively affect your application.
Pro Tip: In advance of filing the application, aim to leave three months of clean transactions in your advance banking history. New large financial commitments or loans should not be accepted until your financial picture is clearer.
Effects of Credit Scores on Mortgage Approvals
A mortgage application’s acceptance hinges heavily on your credit scores. If approved, the interest rate will depend on how high or low your score is. Higher credit scores indicate you are able to pay back loans without defaulting on them, signifying to lenders that you are a low risk borrower.
Understanding the Importance of Credit Scores
Mortgage lenders generally determine creditworthiness using the following credit score guidelines:
- Excellent (Above 740): Lowest interest rates and best mortgage terms.
- Good (700-739): A variety of rates that are reasonably competitive.
- Average (620-690): You may be eligible for a loan, but you would paying a higher interest rate.
- Below Average (Below 620): Chances of getting accepted are slim without assistance.
Tips to Enhance Credits Before Applying
Bring down outstanding payments and ensure that your credit cards debt doesn’t exceed 30% to improve scores.
Do not close long owned cards, as it will drastically reduce your credit history.
Challenge mistakes in your credit form; no matter how minute, these errors will weight down your score.
Incorporating Additional Documentation
If lenders notice gaps in employment, late payments, or any unusual information, they may ask for more documentation in form of an explantatory letter to clarify something regarding your background, leading to further inquiry.
Book Our Service to Write your Letter of Explanation.
An LoE is necessary for these scenarios:
- Gaps in Employment
- Account Receivable Unpaid Invoices
- Unexplained Changes in Bank Account Activity
How to Prevent LoE Rejection and Having Your Claim Denied:
LoE must be reasonable in length and scope. It must not be unreasonably precise, overly personal, or complicated in any manner. Also state the reason behind filling LoE and make sure your claim is backed by evidence in form of sale agreements, invoices, or contracts.
How To Be Successful With A Mortgage Application
It can be quite an exasperating process, but with patience, it can be achieved. These steps should help:
1. Be Systematic:
Have a list of all the legal documents that are required. Make sure your files are kept ready in advance so you don't miss out on any updates.
2. Do Not Take Financial Risks And Avoid Closing Accounts:
There should not be any opening new credit accounts, buying a car, or agreeing to become co-signers on loans with friends. By taking these actions, you will miss out on favorable debt-to-income ratios.
3. Use a Broker:
Only a mortgage broker or loan officers can help you formulate a housing loan application; they will be able to tell you how to commit the documents and remove any weak points made.
What to Do when Your Letter of Explanation Gets Rejected
LoE rejection tends to feel demotivating – and that is totally understandable. However, if your lender has rejected your LoE, don’t lose hope. Follow the steps below to help you recover.
Look Into The Details Again - Speak to the lender in detail and ask for their feedback on what is needed for them to approve your letter.
Submit Missing Information - Supplement any details, information, and documentation that was not provided in the first round.
Consult Professionals - Consider the services of a qualified mortgage expert and seek to improve the clarity of your LoE.
Reactively and Honestly Respond So That You Can Boost Your Chances of Approval
At times, the loan application process can feel cumbersome and exhausting. But, remember that good planning and organization is where it all starts. By having all the documents organized, addressing any red flags proactively, and thoroughly clarifying any concerns that the lender may have, the chances of approval get a significant boost.
Above all else, remember that the truth is vital. Lenders need to know that you are honest, reliable, and financially equipped for the situation which ultimately leads them to approval.
Have you considered filing a mortgage application? Start gathering your important financial documents and feel free to talk to someone who is already a professional in the field for more assistance.