Mortgage Loan Process Checklist: Be the Best Borrower, Prepare for Paperwork

Unlike the days of the housing boom—when loans were proffered with little to no documentation of income—those looking to purchase or refinance in the current lending environment should be prepared to fork over loads of information and documentation to any potential lender. Because of tight restrictions in lending and skittishness on the part of banks, borrowers will need to work hard to have a tidy personal finance ship if they hope to see their loan application approved. Here are some tips on getting prepared:

Applying for a loan today involves a mountain of paperwork, as opposed to the pre-boom days where two months work history and a firm handshake could practically buy a house.

1. Check your credit. This old stand-by advice holds especially true today, when even the smallest dent on your credit rating can cause big trouble when it comes to obtaining a home loan. Check the reports from each of the major credit bureaus, and take the time to challenge or correct any bit of information that is askew.

2. Get your papers in order. Banks are asking for years of income documents, including pay stubs, for verification of income. Go through your files and ensure that you have these documents available; if not, contact your human resources department to see how you can get copies of back statements. You don’t want your application held up because your paperwork isn’t in order.

3. Be ready to explain. Lenders are going through documentation with a fine-toothed comb, sometimes even questioning certain bank transactions that seem (to them) to be red flags. If, for instance, you take out a lot of cash, be prepared to explain where that money is going. On the flip side, if you receive large deposits that aren’t business-related, your lender may want you to explain those as well.

4. Get some skin in the game. While there are still a number of different mortgage vehicles on the market, the once-popular interest-only and adjustable rate mortgages have become more difficult to obtain, as lenders want to see borrowers shouldering some of the financial risk implied in their homeownership. Homeowners looking to refinance will need to hold equity in their home—often at least 20 percent—which can be difficult for those homeowners who are underwater. For homebuyers, substantial downpayments are quickly becoming the norm.

5. Wait. In some cases, there isn’t much a prospective borrower can do other than wait for a more opportune time to borrow. This is particularly true for those who were recently unemployed and have just found a new job; lenders are looking for job stability, and some borrowers are being denied until they can show that they’re at their new job for over a year or two. The same advice goes for those needing to build up equity or establish a downpayment: months of saving up pennies may be the only solution. With low mortgage rates supported by the Federal Reserve, it’s unlikely that today’s great rates are going anywhere any time soon, so, at least as this benefit is concerned, borrowers most likely have time on their side.