In the mortgage application process, mortgage lenders assess their risk and collect proof that the borrower can and will repay the loan in a timely manner. This proof includes everything from your credit and how much money you earn to your repayment history.
With your application, you might have to answer tough, personal and seemingly trivial financial questions. The best thing you can do is be prepared.
“You should be ready to explain any discrepancies in your credit history such as late bill payments, being turned over to a collection agency or a bankruptcy,” says Don Boop, mortgage loan originator at Linear Home Loans, based in Orange County, California. “It’s a good idea to have dates, amounts and causes ready if you think these situations will come up.”
Common mortgage application questions
- Employment and income
- Savings and assets
- Down payment
- Loan purpose
- Property use and type
- Closing timeframe
Employment and income
- Where do you work?
- How much do you make? (You’ll be expected to document income with copies of tax returns, as well as give the lender permission to request your tax return transcript. If you collect a paycheck, you’ll provide copies of pay stubs and W-2s. If you’re self-employed, you’ll likely need to provide business records and other documentation.)
- How long have you been at your job?
- How is your income derived — steady salary or irregular income? (If your income varies, or is based on bonuses or commissions, you might need to provide details.)
What works in your favor: You can prove steady employment (two or more years) with the same employer or in the same line of work.
What complicates an application: You are self-employed or a contract worker.
- What recurring debts do you have? This includes auto loans, alimony, student loans and credit cards. (You might be asked to document your recurring debts by providing copies of your bills.)
What works in your favor: Your monthly debt payments account for 36 percent or less of pretax income, and you haven’t made a major purchase (like a car) recently.
What complicates an application: Your credit cards are maxed out, your monthly debt payments account for more than 36 percent of your pretax income, you’ve opened a number of credit cards recently or you have large credit lines you’re not using.
Savings and assets
- How much money do you have in the bank?
- How much do you have saved in 401(k), stocks, bonds, mutual funds and other investment accounts? (You will be asked to provide copies of brokerage statements.)
What works in your favor: You can show that, after closing, you will have at least two months’ worth of mortgage payments in the bank.
What complicates an application: You will have little cash in the bank after the down payment and closing costs.
- What is the size of the down payment?
- Where does the down payment money come from — is it all from your savings, or did some of it come as a gift from family or a grant from a nonprofit? (You will have to document the source of your down payment by providing copies of several months of bank and brokerage statements, and letters from any gift-givers and grant makers.)
What works in your favor: The down payment comes from savings or from equity from a home that you’re selling. Even better: The down payment is 20 percent or more.
What complicates an application: You have trouble documenting where your down payment money comes from.
- Are you borrowing to buy a home or to refinance the current mortgage?
- If it’s a refinance, do you want to take cash out at closing? If so, how much? Do you plan to use the cash to further your financial goals, such as paying off credit card debt or remodeling your home?
What works in your favor: The loan is for a home purchase or a simple rate-and-term refinance, without taking cash out.
What complicates an application: You’re getting a cash-out refinance.
Property use and type
- What’s the address?
- Do you plan to live in the house year-round, or is it investment or vacation property? (Always be honest about your intentions with the property. If it’s an income property, for instance, you’ll need an investment property loan, which has different terms than a mortgage for a primary residence.)
- Is it a house, duplex, condominium or co-op?
What works in your favor: The house is a detached single-family home to be used as a primary residence.
What complicates an application: The property is a duplex or condominium, or will be used as a vacation home or an income rental property.
- Are you applying for the mortgage with a co-borrower (such as a partner, spouse or other family member)?
What works in your favor: If your credit needs work, a co-borrower with good credit and steady income can boost your chances of getting approved, and potentially for a bigger loan.
What complicates an application: A co-borrower with poor credit or a higher debt-to income (DTI) ratio could hurt your odds.
- How quickly do you want to close?
What works in your favor: If you suggest a reasonable timeframe, most lenders can accommodate your desired closing date.
What complicates an application: If you need to close quickly, it helps to be as organized as possible ahead of your application, and responsive to any questions the lender might have.
Note: “Complicates” doesn’t mean “impossible.” It means you might have to provide more documentation, that the loan decision might take more time, or you might have to pay a higher interest and or fees. In other words, you might face more hurdles and questions than a borrower with a simpler loan application.
Questions a mortgage lender should never ask
While the list above may make it seem like mortgage lenders can ask you anything they want, there are some red lines, according to Darrin Q. English, senior community development loan officer for Quontic, an online bank. These questions, he says, are on his “do not ask” list:
- Sexual orientation
- Family expansion plans (A lender can ask how many children you currently have and their ages, but they can’t ask if you plan to have more or discriminate based on familial status.)
- Political or religious beliefs
- Medical history
In addition, although a lender can ask about some of these categories, it can’t discriminate based on race, religion, color, age, marital status, sex or national origin. There may be other protected classes enforced by your state, as well.
Questions you should ask your lender
While your lender will have lots of questions for you, you can also ask your lender questions such as:
- What type of mortgage do you recommend for me?
- Do I qualify for any assistance programs?
- Why is this my interest rate/annual percentage rate?
- Are you performing a hard credit check?
- Can I lock my mortgage rate and is there a fee for doing so?
- What costs will I have at closing?
What documents are needed for a mortgage application?
Ask your mortgage lender for a list of documents you’ll need so you can start preparing the file ahead of time. Anticipate backing up every claim you make on your mortgage application with documentation. Document requirements vary by applicants and lenders, but if, for example, you have an IRA or income from rental property, chances are you’ll need to prove it.
Proof of income
A lender wants to know that you’ll be able to repay the loan. At minimum, you’ll need to provide:
- The previous year’s W-2 form
- Your most recent pay stub
- Your tax returns from the past year
Depending on your income history and the size of the loan, you may have to show additional paperwork. For example, getting a mortgage when you’re self-employed often requires even more documentation, like profit and loss statements from your business or 1099 forms if you work on a contract basis.
Earnings outside of a regular job
If you make money from other sources, you’ll need to provide detailed information about that, too. Someone who receives child support or alimony will likely have to show the lender a copy of the divorce decree. Someone who earns income from a rental property may be asked for a copy of the lease agreement.
You’ll have to put together a complete list of all your debts, including credit cards, student loans, car loans, alimony and child support payments, along with statements that show balances and the minimum monthly payments.
Be prepared to present an inventory of assets including bank statements, investment records, retirement accounts, real estate and auto titles and any other major items of value.
The bank wants to be sure you have enough savings to weather any unexpected expenses after you close on the house. They may also want proof that you paid the down payment from your own account and not as a loan from someone else.
You may have to sign an IRS Form 4506-T, which allows the lender to get a transcript of your tax return from the IRS. In some cases, the lender wants to see that what you declared to them matches what you declared to the IRS. The form verifies that all the information on your W-2, 1099 or 1040 matches what’s on your loan application.
If you had a bankruptcy within the past several years, you may be asked for your bankruptcy discharge papers. In some cases, a bankruptcy can appear on your credit report for up to 10 years. Even if you’ve been on sound financial footing since then, a lender will want to see that you’ve settled with your creditors.
After you complete your application, avoid making big purchases or financing anything until the closing. Major financial moves like these can affect your risk as a borrower and your credit score, as well as increase your DTI ratio. These changes might require resetting the underwriting process or could disqualify you altogether.