If you go through the process of getting a mortgage loan in today’s market, one question you are likely to ask is: “Why are you asking me for so much stuff?”
Some borrowers remember the “good old days” when loans were done on a handshake. If that is what you are expecting to happen now, you are in for a rude awakening. Even if you have pristine credit and a large down payment, the reality is that in today’s world, you are going to be required to document and paper-trail every last detail of your financial life. A word of advice: Don’t take it personally! Guidelines are the same for everybody, so just realize that you are not being singled out.
Let me explain some of reasons why so much documentation is required, and give you some pointers to make the process less invasive and frustrating (for you and your lender). First the why.
Anti Money Laundering: The Bank Secrecy Act (BSA-AML)
The government has basically recruited the entire financial services industry in the fight against terrorism through the Bank Secrecy Act that went into effect in 2012. The rules require mortgage companies to document certain aspects of your finances when you apply for a loan. Here are some prime examples:
- Source of your down payment. You will need to prove where the money came from, how it got into your account.
- Source of large deposits into your account. Depending on the type of loan you are applying for, a large deposit will usually mean any non-payroll deposit that is more than 15% of your gross monthly income. Those deposits have to be documented, so if you are pulling the money out from under your mattress, it is not going to be accepted. The money will need to be in the bank for at least 2 months to be considered an acceptable source of funds.
Along those lines, here are a few specifics you may run into:
- If you are selling something for your down payment money. You will need to prove 4 things:
- You owned it (the title or a receipt from when you bought it)
- It was worth what you sold it for (appraisal or valuation)
- Someone bought it (bill of sale)
- You received the money for it (copy of the check or deposit slip)
- If you are cashing out an investment account. You will be asked to provide:
- Precisely what stocks or bonds you sold
- Proof the trade cleared and when exactly the funds were deposited into your account.
- If you are getting a gift for your down payment. You will need to provide:
- A gift letter signed by you and the donor of the gift (in most cases, only close family members are allowed as donors).
- Proof of the donor’s ability to give the gift, as well as the actual transfer of funds from the donor to the buyer. This can be shown through a copy of a transaction history from the donor’s bank account showing the balance before the gift and the actual transfer out of the account. If any deposits are showing on this transaction history, they must also be documented to ensure the funds are not coming from an ineligible source such as the seller, a Realtor or the lender. The source of the deposits in the donor’s account does not matter – we just need to evidence the deposits did not come from an interested party.
- Copy of the check from donor to buyer (or directly to the title company).
- Evidence of deposit into the donor’s account and the new available balance.
Another Reason Why: “Buy-Backs”
Right after closing, most mortgages are sold to large banks and financial institutions like Fannie Mae or Freddie Mac. They bundle the loans into bonds that get sold to investors. This is how mortgage companies make a profit, and the money keeps flowing. However, if there are problems with the loan later, Fannie Mae and Freddie Mac can ask the mortgage company to buy the bad loan back at face value. In recent years, they have stepped up their efforts to find any excuse to force these repurchases. This is incredibly expensive for mortgage companies. In fact, many of those that went out of business over the last several years were forced to close their doors because of losses suffered by this issue.
Things as simple as improperly copied paystubs or a missing page from a bank statement, (even if it is a blank page), could be used to force the buy-back. The answer to the problem was to tighten up underwriting guidelines to try to make every loan fit within a neat little box. Since everyone’s circumstances are unique, the challenge becomes providing the documents to make this happen.
Read more about this issue here.
Over the last few years, at least 14 new or amended regulations have hit the mortgage industry. These include Regulations B, C, D, E, F, G, H, N, O, P, V, X, and Z. (You think I’m joking but I’m not!)
These regulations impose huge fines and/or criminal charges on banks or financial institutions who fail to comply. Therefore, the number one question that bank and financial executives are asking themselves is, “How can we make money without going to jail?”
So…What do I do about it?
Since documentation requirements are part of the reality of getting a mortgage today, the best advice I can give you is this: If your mortgage lender asks for something, give it to them. There was a Forbes article recently that said: “…consumers who enter the mortgage approval process ready to battle their chosen mortgage lender will come out with a nightmare story to tell.” That’s a true statement. If they ask you for it, it’s because they need it in order to get your loan approved. They’re not trying to hassle you.
Yes, getting a mortgage loan these days can be frustrating. The process can be daunting, and the paperwork can be overwhelming. But relax. Choose a lender you like and trust, then allow them to guide you through the process. You’ll get through this!