The 5 Most Important Items for Loan Approval
Getting approved for a loan takes more work than ever for the borrower; when you think every single thing has been submitted, there is always one more thing to do and often these final items are the most difficult to obtain. Lending guidelines have changed greatly over the last decade and more than ever lenders need to be meticulous. In order to sell their loans on the secondary market there is no question as to the strength of the application, and even if you don’t agree with it, your loan won’t move forward without all of the requested items. If you’re applying for a new loan, there are a handful of items you need to have in place. Here are the five most important items for loan approvals in today’s market.
Bank Statements
It’s no longer enough to have your down payment and closing cost money in the bank; this money has to be in your account for at least 60 full days. Your loan submission needs to include a minimum of two bank statements, and it can get a bit tricky when there are large deposits and withdrawals. Any deposit over $500 must be verified by the lender. Not only will you need to come up with cancelled checks, you might have to write a letter explaining the source of the funds. If you have one bank account for several rental properties or you mix your business and personal funds, you may be creating a problem. As you send your bank statements, you should take a look at what you will need and begin gathering these items ASAP.
Rental Properties
With each rental property you own, there are several items you will need to supply to your lender. In the past you could get away with a copy of the lease and a few rent checks, but today you will need these items and a copy of the tax bills and homeowner’s insurance statement. Receiving your rent in cash may cause problems; certain lenders need to verify the rental income in order to count this as income while some will accept cash if there is a consistent pattern of cash deposits. If the amounts are staggered every month, it may be up to the individual underwriter as to what they may use or accept; if you submit your loan to three different lenders, it’s entirely possible to get three different answers. How much of the rental income that is used can also vary from lender to lender. In the past, the standard number was 75% of the rent received, but today some lenders will accept 70% and others will need 80%. Before you get too far with your application, ask your lender exactly which rental property items you will need.
Tax Returns
Having leases on your rental property is great, but you need to make sure it matches what is on your tax returns. With every investment property loan submission, you need to supply the full tax returns. For some borrowers, this means sending a frustrating 40+ page document for just one year. The bottom line is that if your tax return does not include all sections, your application won’t be reviewed. At a minimum, you will be required to supply two full years, and the lender will use your adjusted gross income number on your tax return as your annual income amount. For any rental income they will only use the amount that you declare on your tax return. Providing the items required for your tax return can be especially daunting for self-employed borrowers or borrowers with multiple rental properties.
Appraisal
For most borrowers, the most frustrating part of the loan process is dealing with items that are beyond their control. One of the biggest changes in the loan process is with how the appraisal is ordered. If you’re working with a mortgage broker, they give your payment information to whatever lender they are using. Then, the lender orders the appraisal and the broker has no communication with them at all. This leads to out-of-area appraisers coming in which can result in a dispute in the value. Today, the appraisal is more scrutinized than ever before. Multiple people review every single comment by the appraisal and comparable sale that is listed. Getting the appraiser to come back out to the property is at the borrower’s cost, and it isn’t uncommon to have an appraisal problem drag for several weeks.
Closing Costs
Not all of the changes in the loan process have been negative and one positive change deals with how closing costs are verified. Before any loan is submitted to the lender, the borrower must receive and verify receipt of the fee worksheet. The fees listed must match what is received on the final closing paperwork; this is done to protect the borrower and restrict extra fees being added at the closing. If the fees don’t match, the changes must be made and the loan may be forced to wait three days before it can close. Now more than ever, you can be confident that the deal you agreed to will be exactly what you see at closing.
While it can be easy to be frustrated with the new loan requirements, your best bet is to take a proactive approach. Take a look at what you need before you start the process. Even if you think these steps are unnecessary, they are essential if you want to successfully close your loan.