Why lenders want documents

Lenders are no more enamored of paperwork for its own sake than you probably are. Yet lenders see the necessity of documentation to support and verify the statements you made on your loan application. That's the primary purpose of all the paperwork.

Lenders also want documentation so they can:

  • assess your financial ability to repay your loan,
  • create a document trail for audit or assessment purposes,
  • reduce the incidence of loan fraud, and
  • sell your loan to investors in the secondary mortgage market.

Beyond those general reasons, why do lenders want specific documents?

Income verification
The lender wants to see your federal tax returns, W-2s and paycheck stubs to verify the income you stated on your loan application. The lender also will want to call your employer to verify your salary and length of employment. The lender's concern is that you might not be able to make your loan payments if you overstated your earnings or your income depends on commissions or bonuses. The lender also may use your tax returns to look for income, assets or debts that you didn't disclose on your application.

Rent payments
If you currently rent your home, the lender likely will contact your landlord to verify your history of rent payments. This verification is another way for the lender to assess your creditworthiness.

Account statements
The lender will want to review your checking, savings and investment account statements to verify your assets and confirm that you have enough money for your down payment and closing costs. Some loans require that you have at least two months of mortgage payments on hand in case of a financial emergency. Account statements are used to verify those reserves.

Alimony and child support
If you included spousal or child support as a source of income on your loan application, the lender will want court documents to verify the amount and duration of those payments. Your divorce settlement also helps the lender understand any joint accounts that might still appear on your credit report.

Debt verification
The lender wants to know the minimum monthly payments on your vehicle and student loans and credit cards because those obligations reduce the amount of income you have available to make your mortgage payments. Again, documentation helps the lender confirm the information you stated on your application. If you filed for bankruptcy in the past, the lender may want a letter of explanation and proof that your bankruptcy has been discharged.

Profit-and-loss statement
If you're self-employed, the lender may demand an accountant-certified profit-and-loss statement for your business. This statement shows the income and expenses of your business and again is used to verify the information on your loan application.

If you're unable to provide adequate documentation, ask about a "no-doc" or "low-doc" loan, which involves much less paperwork. You might be charged a higher interest rate to compensate the lender for the perceived higher risk of an undocumented loan, unless your situation is very straight-forward and your credit score is exceptionally strong.

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