5 Things to Know About Applying for a Mortgage

Even though interest rates are likely to begin rising again (haven’t we been saying that for a couple years now?) mortgage rates are still reasonable, and buying a home these days is still cheaper than renting in most areas, providing you’re planning to stay for a bit. Buying a house is more than just a financial decision, but if after considering all the factors, you’ve decided that now is the time to buy, prepare yourself for the mortgage application process. And I mean gird yourself because it is a royal pain. Here’s what to expect:

Pre-approval is just the beginning. In a competitive housing market, sellers typically won’t even consider offers from buyers who aren’t pre-approved for a mortgage. Obtaining a pre-approval is a relatively easy process. You simply provide your mortgage banker with your Social Security number, annual income and a few other simple facts. However, if you get pre-approved, you’ll have to prove the information you provided, so don’t give inflated numbers.

Set aside some time to address next steps. Having your offer accepted by a seller sets off a whirlwind of time-sensitive tasks. Not only do you have to schedule, complete and PAY FOR the house inspection within a week, you’ll also have to hire a lawyer and secure a homeowners insurance quote right away. Best to get these things lined up before you start making offers. Your real estate agent may have suggestions for people to help you, but it’s less stressful to shop around a bit first to make sure you’re getting the best price from someone you actually like.

Your contract will also set a “clear to close” date that could be only a couple weeks away, which means you’ll have to get hopping on formally applying for a mortgage. This requires providing a slew of financial documents so if you’re not super-organized, you’ll need a couple of hours to gather and scan everything you need like tax returns, W-2s, bank statements, etc. And if you’re self-employed, you’ll need to provide a current income statement, which is akin to preparing for tax time. Better get busy. 

Save your pay stubs. Standard document retention guidelines tell you to save your most recent pay stub and shred the rest. However, when I applied for a mortgage, I had to show my last two months, which was a hassle since my employer at the time still provided paper stubs and mine were long gone in the shredder. If your lease is almost up and there’s any possibility you’ll be buying, stop shredding for a bit.

Prepare to explain everything in your bank account. I’ve never been audited by the IRS (knock on wood), but I felt like that’s what was going on during the mortgage application process. You’ll have to provide your last two months of bank account statements to verify that you have the money required for a down payment and that you aren’t living on the edge financially, which makes you a risk factor for not paying your mortgage.

I was surprised at the level of explanation required of my checking account activity. Particularly, I had to explain and provide documentation for any deposit of more than $1,000. I had a mobile deposit of an expense reimbursement check that didn’t show who wrote the check. This was a big sticking point that held up the process until I could get an actual copy of the check.

Since I obey my bank’s rule of shredding the check 14 days after the deposit clears, I did not have the check anymore and my bank didn’t retain the mobile deposit image. This explanation didn’t matter to my mortgage underwriter and subtracting the amount from my available funds was not an option. Make sure you keep documentation of this stuff if you’re planning to apply.

Additionally, if you’re planning to use gift money for a down payment, you may need a gift letter explaining that the money is yours to keep. Banks are sticklers for making sure the money in your account is actually yours and not just there to make it look like you have a down payment. If you’re not selling an existing house and planning to use the proceeds for a down payment on your next house, you’ll have to demonstrate very clearly that you have the funds and have had them for some time.

Make sure you can access your money. This sounds silly, but in today’s digital age, it’s easy to go for months or even years without stepping foot inside your bank’s branch. When you go to the closing for your new home, you’ll need to bring a cashier’s check for your down payment and any closing costs that you’re not rolling into your mortgage, and you won’t know the exact amount until pretty much the day before. If your bank is in Michigan and you now live in Illinois, that could be a problem. Make sure you get this little detail ironed out so you’re not scrambling at the last minute.

Buying a house is big deal. Don’t let the intrusive and extensive mortgage application process ruin an otherwise happy and exciting occasion. Be prepared!

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