Mortgage Lenders: Your Investment Papers, Please!

When applying for a mortgage, lenders will ask for a range of financial documents to assess your eligibility. This includes proof of income, such as W-2 forms, pay stubs, and tax returns. They will also want to see bank statements and other asset information, such as investment accounts. Lenders need to verify that you can afford the mortgage payments and that your income is stable and consistent. They may also ask for additional information, such as details of any legal issues, divorce decrees, or bankruptcy records. It is a good idea to start gathering these documents before applying for a mortgage to speed up the process.

Mortgage lenders can ask for bank statements to verify income and affordability

When applying for a mortgage, lenders will ask for your bank statements to verify your income and affordability. This is a necessary step to evaluate you as a borrower and ensure you'll be able to consistently pay back your loan. Lenders will typically ask for two months' worth of recent bank statements during the loan application process. They will look for regular deposits, paychecks, or other sources of income to ensure you have a steady income to cover your monthly mortgage payments and other financial commitments. They will also check your account balance to confirm you have enough money for a down payment and closing costs.

Lenders will also analyse your spending habits and recurring expenses to gauge your ability to manage money responsibly. They will look for consistent bill payments, existing debts, and any other financial commitments. This helps them assess your financial stability and evaluate the risk associated with lending money to you. They will also want to see a stable financial history, so frequent overdrafts, large unexplained transfers, or erratic account behaviour could raise concerns.

Additionally, lenders will use your bank statements to verify that your assets are "sourced and seasoned". "Sourced" means that the lender knows where your money is coming from, and "seasoned" means that the funds have been in your account for a while and haven't been dropped there suddenly. This helps prevent fraud and money laundering and assures the lender that you aren't using a loan for your down payment.

If you are self-employed, lenders may ask to see more than two months' worth of bank statements to verify your income, as your earnings may be unpredictable or seasonal. They will also want to see proof that you keep your business and personal accounts separate.

Lenders may request tax returns to verify income and identify debts

Tax returns provide information about employment, salary, and other sources of income, such as rental property income or retirement income. Lenders use this information to calculate the borrower's debt-to-income (DTI) ratio, which is an important factor in the mortgage approval process. The DTI ratio is calculated by dividing the borrower's total monthly debt payments (including the future monthly mortgage payment) by their gross average monthly income. A lower DTI ratio indicates lower financial risk and makes the borrower more attractive to lenders.

Lenders also use tax returns to identify any tax write-offs, losses, or deductions that may impact the borrower's income. For example, unreimbursed business expenses, Schedule C losses, and Schedule E losses can be netted out of the borrower's income. Additionally, depreciation claimed on Schedule C or S-Corp returns may be added back into the borrower's income. These adjustments can significantly affect the borrower's ability to qualify for a mortgage and the amount they can borrow.

By requesting tax returns, lenders can verify the accuracy of the borrower's income statements and identify any debts or liabilities that may impact their ability to repay the loan. This information helps lenders make informed decisions about the borrower's eligibility for a mortgage and ensures that the loan is affordable for the borrower in the long run.

Mortgage providers may ask about your investments to assess your overall financial situation

Mortgage providers are permitted to ask for investment papers as they need to assess your overall financial situation. They will want to know that you can genuinely afford to repay the mortgage and won't default on your repayments. They are required to prove that you have the ability to repay the debt for at least the next three years. To do this, they will need to gather lots of information about your past so they can try to predict your ability to repay in the future.

Mortgage lenders can ask about your income, assets, debts, and credit history. They will ask for bank statements, tax returns, and pay stubs to verify your income. They will also want to see your bank statements to confirm the source, frequency, and value of your income. They will cross-reference your cash flow figures with your mortgage application, your latest P60, and three months of payslips. They will also want to confirm your regular outgoings and any other cash reserves.

If you are self-employed, you will need to provide a profit-and-loss statement, a balance sheet, and one to two years of federal tax returns and supporting documents. This is to demonstrate your business's ability to generate stable income over an extended period. If you are including other cash reserves in your mortgage application, your lender will need to confirm these balances by looking through your statements.

Mortgage lenders will also want to see your investments, such as retirement accounts, stocks, and bonds. Having high-value assets makes you look less risky to lenders as it means you are better equipped to make a larger down payment and pay your mortgage payments on time, even in an emergency.

Lenders will often ask for proof of deposit to ensure it is from a legitimate source

The proof of deposit requirement is not just about proving that the borrower has the necessary funds but also about establishing the origin of the money. Lenders need a paper trail, such as bank statements, to ensure that the deposit is from a legal and legitimate source. They prefer to see the funds accumulating in the borrower's account over an extended period, typically at least three to six months. This helps them identify any discrepancies in income and ensure that the borrower is not borrowing money from someone else for the down payment.

Lenders will also want to know if the deposit includes gifted money from family members or friends. In such cases, they may require a signed legal agreement confirming the terms of the gift and stating that the donor has no rights over the property. Additionally, the lender may ask for proof of the donor's identity and their bank statements to ensure they have the funds to gift.

Lenders have strict anti-money laundering regulations to adhere to, and they must ensure that mortgage deposits are funded by legitimate sources. By asking for proof of deposit, they can verify that the borrower's funds are not involved in any illegal activities. This extensive verification process helps protect all parties involved in the transaction and ensures compliance with legal requirements.

Mortgage lenders may ask for additional documents if there are any blemishes on your credit report

Mortgage lenders will typically ask for a range of financial documents to assess your eligibility for a loan. This includes proof of income, employment, assets, and debts. They will also want to see your credit score and credit history.

If there are any issues with your credit report, lenders may ask for additional documents. For example, if there are any blemishes on your credit report, the lender's underwriter may ask you to write a letter of explanation, also known as an LOE or LOX, outlining the circumstances behind the issue. This is to clear up any uncertainties and show other parties involved in the loan that they have done their due diligence.

Mortgage lenders are also legally allowed to ask about your ethnicity, marital status, and divorce status. They may also ask if you are part of a lawsuit, as this could impact your ability to pay for a loan.

Frequently asked questions