Down payment: What is the purpose?
Why do lenders want a down payment when you purchase a home? It’s all about security.

It’s standard procedure to make a down payment on a home at closing, and lenders have a good reason for wanting you to make one.

Security for the lender
A down payment provides security for the lender. If you put a significant amount of your own money into a home, you are less likely to walk away and default on the loan. Lenders, understandably, want to make sure that they’ll be repaid; your down payment provides that reassurance.

Easier loan approval for you
Another reason for lenders wanting a down payment involves loan approval. Your down payment makes it easier for you to qualify, and the more money you put down, typically, the easier it is for you to be approved. Though it may be possible now to obtain a loan with no down payment whatsoever, qualifying for a loan is a lot easier if you’re able to make a down payment.

Building your equity
When you make a down payment on a home, you’re building equity (the percentage of the property you actually own). And the more you put down, the greater your equity. The more equity you have, the less you need to finance and the less overall interest you will need to pay on your loan. A down payment therefore benefits not only the lender, but you as well.

Why lenders want documents
Tax returns, W-2s, bank statements–the list goes on. Why does getting a loan involve so much paper?

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.

Anxious about getting a loan? Here’s help
Go slowly to establish trust and get a home loan that meets your needs.

Let’s be honest: Applying for a home loan can be one of life’s most stressful experiences, and many people, especially first-time borrowers, are anxious about taking that first step.

Being nervous isn’t unreasonable. After all, a home loan is a major financial commitment; the application and approval processes are unfamiliar and complicated, and the ranks of loan officers, like those of any profession or trade, may include some folks who don’t have your best interest in mind.

Fortunately, there are some good strategies you can use to confront whatever fears stand in the way of your goals. Here are some suggestions to help you stop being overwhelmed by the entire process and instead focus on the first steps:

Be prepared
Before you begin to study specific loan products, think through your long-term financial and homeownership goals, and get ready to present your situation and explain your needs to the loan officer. Go over your household finances and figure out how much you can afford to spend on housing. Try to make a budget that includes estimates of property taxes, homeowner insurance, utilities, homeowner association dues, and maintenance and repairs as well as a monthly mortgage payment. For help figuring out how much you can afford, try our home affordability calculator.

Ask questions
Your initial conversation with a lending professional should be more of a fact-finding mission than a commitment on your part to obtain a loan through that individual. Prepare a list of questions you want to ask and pay attention to whether the loan officer listens to your needs and replies to your questions with information that you understand and that’s helpful to you. Take notes, so you’ll be able to reassure yourself later that you understood what you learned.

Set expectations
As part of your information-gathering process, ask the loan officer what services he or she provides. Explain that you want to be educated and kept informed about the progress of your loan. If you decide to submit an application, ask the lender to walk through the application and disclosure documents with you.

Mortgages aren’t free
No one wants to be overcharged for professional services, yet loan officers need to make a living and lenders need to make a profit to stay in business. You should expect to pay reasonable and customary costs, and you should receive a government-mandated Good Faith Estimate (GFE) of those costs before your loan closes. Tell the lending professional you don’t want to encounter any surprises when you sign your loan documents. For help understanding the GFE, read The Good Faith Estimate.

Say no
Remind yourself that you can always say no and walk away if you feel uncomfortable during your initial conversation. In fact, walking away is still an option even after you’ve completed an application, though you may have to forfeit an application or appraisal fee. Making sure you feel comfortable early in the process is the best way to protect yourself from a total meltdown later on.

Consider your options
Comparing products or services is a natural part of any big buying decision. Be sure to use a trusted source, like LendingTree.com, to help you find lenders that will meet your needs. When comparing, look beyond monthly payment and consider all the terms of the loan and how it will support your future financial goals. It’s also important to factor in how comfortable you are with the level of service you feel the lender will provide.

Rely on trusted resources
While these strategies can help you overcome your fears, at some point, you’ll need to trust the professional and company you’ve selected to do a good job for you. It’s okay to proceed slowly. Be patient, gather information, make thoughtful decisions and stay focused on your long-term financial and homeownership goals.