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.

40-year mortgages
You’ll get lower monthly payments with a 40-year mortgage, but consider the drawbacks as well.

As home prices have risen in recent years, new strategies have emerged to help buyers afford a home. But one of these “new” strategies is really an old one that’s returned to favor: the 40-year mortgage. A number of lenders offer them, but are they a good deal? Let’s look at the pros and cons.

What is a 40-year mortgage?

A 40-year mortgage is a conventional mortgage, but instead of repaying the principal over the standard 15, 20 or 30 years (the amortization period), you pay it off over 40 years. In many cases, the lender simply extends the life of its 30-year fixed-rate mortgage to 40 years. Some lenders also offer a 40-year version of their adjustable-rate mortgage (ARM).

The advantage

The biggest advantage of a 40-year mortgage is that you get a lower payment. For example, the monthly payment for a 30-year, $100,000 mortgage at 6 percent would be about $599. By choosing a 40-year mortgage, you would get a slightly higher interest rate — say, 6.25 percent — but your payment would fall to $568.

That’s not a huge difference, but it could be enough to let you buy a home you couldn’t afford with a 30-year mortgage. Just a few dollars a month can be the difference between qualifying for a mortgage and not qualifying. A 40-year mortgage could also help you buy a higher-priced house for the payment you can afford, especially if mortgage rates are high. Or it could leave you more money for other expenses.

The cost

A 40-year mortgage also has some drawbacks. It carries a higher interest rate — typically, .25 to .375 percentage points above an equivalent 30-year mortgage. And since you’re making payments for 10 more years, you end up paying substantially more interest. Over 40 years, you would pay a total of $172,515 in interest on that $100,000 mortgage at 6.25 percent, compared with $115,838 for a 30-year mortgage at 6 percent. That’s a difference of $56,677.

Another drawback is the speed at which you build equity in your home. With a 40-year mortgage, you will build equity much slower than with a 30-year mortgage, which means when you sell, you’ll get back less of the money you’ve paid into the house. These mortgages might also tempt you to buy a bigger house than you can afford, so it’s wise to make sure you’re not biting off more than you can chew.

Does it work for you?

Despite its faults, a 40-year mortgage may still be a good option. If you’re at an early stage in your career, it can allow you to buy a house you might not have been able to afford otherwise. As your income grows, you can refinance to a mortgage that lets you build more equity.

Remember, few people hold a mortgage to maturity. If, like most people, you move or refinance in five to seven years, the original 40-year term has little effect. And meanwhile, you’ve had the benefit of a lower monthly payment.

A 40-year mortgage can also be advantageous for high-income earners whose mortgage interest payments may be their only major income tax deduction. Or, it might reduce the carrying costs on a rental property.

There are other types of mortgages that can reduce your payments just as much as a 40-year mortgage. One alternative is an interest-only mortgage, which can give you a lower payment but builds no equity at all. Or you can choose a hybrid or regular ARM, both of which offer a lower initial interest rate but could expose you to rising rates later on.

How to choose?

Compare your payment, the interest you’ll pay and the equity you’ll build in the time you expect to be in the house. This will give you an idea of which mortgage is best for you.

Want more information? Get a FREE LendingTree Guide to Mortgages when you request a mortgage loan through LendingTree.

Why lenders require escrow accounts
An escrow account doesn’t just protect you, the borrower. It also protects the lender’s vested interest in your property.

Think of an escrow account as a safety net for your home. It financially safeguards both you and your lender against liens and property damage.

Since most of us do not have the means to buy a home outright, we rely on lenders and mortgages to help fulfill our dreams of homeownership. In turn, lenders rely on escrow accounts to ensure property taxes are paid on time and home insurance policies are kept up to date. Without the assurances provided by an escrow account, a lender’s financial risk could increase significantly.

To fully appreciate the benefits of escrow for lenders, let’s first review what escrow is, and how it works for borrowers.

What is an escrow account?
An escrow account is an account held by a third party agent who represents both the borrower and lender. The borrower makes regular deposits into the account — usually as part of a regular mortgage payment. Then, when property taxes and insurance premiums become due, the third party agent releases the funds to cover the payments.

Rather than paying your taxes or insurance in a large lump sum, many homeowners prefer the idea of spreading their property taxes and insurance premiums evenly over 12 monthly payments. Plus, with escrow, you don’t have to remember to send your payments on time. This means there’s less risk of missed payments or lapses in your insurance coverage.

The benefits of escrow to the lender
If your down payment is less than 20 percent of the property value, your lender will likely insist that you open an escrow account at the time of your mortgage closing. Even if your down payment is greater than 20 percent, your lender may recommend or require that you have an escrow account.

The reason is simple: Escrow accounts provide lenders with added security and peace of mind that their collateral — your home — is protected in a couple of important ways:

1. Your property taxes will always be paid on time, which ensures tax authorities will have no reason to place a lien on your home or foreclose on it.

2. Your home insurance premiums will always be up to date, which means your property will be covered in the event of damage or destruction caused by a fire or natural disaster.

Lenders need these assurances just as much as homeowners.

Imagine if your property taxes fell into arrears and a lien was placed on your home. It goes without saying that it would be an unfortunate experience for you and your family. But your lender would also suffer because without the collateral of your home, it may not be able to get its money back should you default on your loan.

In another scenario, let’s say your property insurance has lapsed due to a few unpaid premiums. And then, during a storm, your house is destroyed. Just as you’re left without a home, your lender is left without any collateral, since there’s no insurance to cover the loss.

You can see why so many lenders insist their borrowers use escrow accounts.

For many new homeowners, escrow accounts are the norm. Even though the funds in escrow typically do not earn interest, the account provides a convenient, hassle-free way to ensure your taxes and premiums are always paid on time. And that can offer peace of mind to you and your lender.