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.

Mortgage calculators do the math in a snap
Shopping for a loan or mortgage? You no longer have to be good with a spreadsheet to accurately crunch the numbers.

Online mortgage calculators make it faster and easier than ever to compare loan products and figure out how much you can afford to borrow.

In fact, mortgage calculators can help you get answers to many of your loan-related questions – whether you’re shopping for a home loan, car loan, or any other type of loan. For example, they can help you to:

Calculate your loan payments
A loan payment calculator can help you determine how much your monthly payments will be for any type of loan, including a mortgage, car loan, or personal loan.

Perhaps you’re in the market for a new car. You’d like to borrow $24,000 and pay off the loan in five years. The best rate you’ve found is 7.2 percent. How much would that cost each month? Simply enter the numbers into a loan payment calculator:

Loan amount: $24,000
Interest rate: 7.2%
Term: 5 years

Next, click the “Calculate” button and instantly you’ll see your monthly payment would be $477.50. A bit more than you can afford? One option might be to take an extra couple of years to pay off the car. Simply change the term from five to seven years, hit “Recalculate,” and you’ll see your new payment amount would be $364.58. Plus, you can view your payment amortization table and find out exactly how much you are paying in interest.

Determine what price home you can afford
The LendingTree home affordability calculator is a great tool to use when you’re looking for a new home. Your first step when buying a home is determining how much you can comfortably afford to spend. The home affordability calculator makes this easy. Just enter your (or your and your partner’s combined) monthly income, the amount you’ve saved for a down payment, and the monthly payments on your other debts (including credit cards or other loans). When calculating your monthly debt payments, be sure to add together all your monthly loan payments including the minimum monthly payment on any credit cards you have (not what you actually pay to these credit cards each month).

To get a better idea of what you can truly afford, input your estimated property taxes and insurance costs. Your real estate agent should be able to help you estimate these costs for the neighborhood you’re interested in. Finally, enter the going interest rate for mortgages and your preferred term.

For example:
Monthly income: $5,650
Down payment: $20,000
Monthly debt payments: $364.58
Insurance (annual): $500
Property taxes (annual): $2,200
Mortgage interest rate: 6%
Term: 30 years

Hit “Calculate” and you’ll see:

Mortgage loan amount: $240,917.14
Price of home you can afford: $260,917.14
Monthly mortgage payment: $1,444.42

Armed with this information, you can shop around to get pre-approved on a mortgage of $240,000.

Compare loan options
Shopping for a mortgage means comparing more than just interest rates. You also have to weigh the benefits of different types of loans.

For example, let’s say that two lenders offer you that $240,000 mortgage — one with a fixed rate of 6.5 percent, and another with an adjustable rate starting at 6 percent and changing every year. The lower rate on the ARM may seem like the better deal but what if rates were to go up by, say, 0.75 percent next year? And what if the upfront costs on the fixed-rate mortgage are $700 lower? If you’re confused about which to choose, simply enter the information in a loan comparison calculator. Assuming you plan to hold onto the loan for 10 years:

Click “Calculate” and get the following results:

Loan 1 (fixed) Loan 2 (ARM)
Monthly payment: $1,516.96 $1,438.92
Maximum monthly payment: $1516.96 $2,469.00
Total cost for 10 years: $189,036 $189,308

The calculator reveals that the two loans are quite comparable — despite the higher upfront fees, the ARM provides a lower monthly payment initially. The total cost for both loans is almost identical over 10 years, provided that the interest rate on the ARM remains constant after the first increase.

However, if you plug in the lifetime interest rate cap on the adjustable rate mortgage, you’ll see how high your monthly payments could potentially be. In this example the monthly payments on loan 2 could rise to $2,469. The lifetime cap on an ARM is often expressed as an increment of the initial loan rate. Therefore, the lifetime cap in the above example is calculated by adding a 6% lifetime cap to the 6% initial interest rate.

* No calculator can predict whether rates will rise or drop. Only you can decide whether you’d be more comfortable with the long-term security of a fixed-rate loan.

Find out if you can save by refinancing
Got a mortgage and wonder whether you’d be better off to refinance? Simply use a refinancing calculator. [http://www.lendingtree.com/smartborrower/Refinance-calculators/Refinancing-calculator.aspx] It will also tell you how long it will take for you to recoup the upfront fees involved.

LendingTree offers numerous similar online tools, such as:

• Cash-out refinancing vs. home equity loan calculator
• Rent or buy calculator
• Discount points calculator
• Adjustable rate mortgage payment calculator
• Loan consolidation calculator
• Home equity calculator
• Line of credit calculator

What you need to keep your home loan on track
There is a lot involved in getting a mortgage approved. Discover what you need to consider to keep your home loan on-target.

You’ve found the perfect house, shopped for a mortgage and chosen a lender. The rest is easy, right? Not always. Before your home loan closes, you will need to make sure all of the paperwork and legal requirements are in order to ensure your loan stays on track. Here’s what you should consider:

The down payment
Your lender will want to know if your down payment is “seasoned” — that is, if it comes from your own savings, as opposed to being a gift from family or friends. Borrowers who use their own funds tend to be lower risk and so often receive better rates. The lender will typically ask for bank statements from the last 60 days. Any funds that have been in your account for two months are considered seasoned. If you have made a large deposit recently, however, the lender will ask you about its source. If you sold investments for your down payment, be prepared to produce the statements from those transactions. If the money was a gift, the family member may be required to supply a letter confirming that the money is not a loan.

Your reserve assets
Lenders consider you a lower risk if you have liquid assets (cash or investments) that you can draw on should the need arise. Ideally, you should be able to cover at least two or three months of mortgage, tax and insurance payments from these reserves. You will most likely need to make copies of your recent bank statements and be prepared to show them to the lender.

Other debts
One of the important measures lenders use to determine your ability to carry a loan is your debt-to-income ratio. As a rule of thumb, your debt payments — including your mortgage, property taxes, insurance, vehicle loans and credit cards — should not be more than 36 percent of your income before taxes. Lenders also like the total of your housing expenses alone to not exceed 28 percent. To keep your loan on track, be sure to disclose all loans and other financial obligations to your mortgage lender, including alimony and child support payments. If your lender discovers that you have not been fully honest in your application, you risk having your loan declined, even after pre-approval.

The appraisal
Your lender will arrange for your new house to be appraised in order to determine what percentage of the home’s value you are borrowing. This is called your loan-to-value ratio. Occasionally, the appraisal comes in lower than your agreed upon purchase price, and this may affect your ability to obtain the amount of financing you need. For example, you might offer $300,000 for a home, intending to put down 10 percent and obtain a mortgage for 90 percent of that amount, or $270,000. But if the home’s appraised value turns out to be $290,000 ($10,000 less than your purchase price), you may have to make up the difference between the appraised value and the purchase price by increasing the down payment.

The title search
A title search involves looking through legal records to make sure the person selling the house actually owns it, and to see whether there are liens or unpaid taxes on the property. Your lender will hire someone to do this and the process is usually very straightforward, however, if the title search reveals a problem, your mortgage is unlikely to be approved until the issue is resolved. For more on title insurance and why it’s important, read Title insurance basics. 

Insurance
Lenders require that any mortgaged property be insured against fire and other hazards. This protects both the lender and the homeowner in the event of a disaster. Ask your lender about the coverage you need and then shop around to find a policy that meets all these requirements and your personal needs. In some areas, for example, you may be required to have flood insurance.

By understanding all of these steps in the mortgage process and your role in them, you can help keep your mortgage on track and avoid any unnecessary delays.

11 questions to ask your mortgage lender
Here’s what you need to know to be sure you choose the mortgage that will best meet your needs.

So you’ve requested a mortgage and received three or four home loan offers. Now what? Here are the most important questions to ask each lender.

1. What is the interest rate?
This is the most obvious question. The interest rate is used to calculate your monthly payments, and it will determine how much you’ll pay over the life of the loan. But you’ll need to understand more than simply the quoted rate. A good benchmark for comparing offers is their annual percentage rate (APR). This figure combines the interest costs and other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage. Make sure to also ask for an itemized list of what’s included in each APR calculation, so you know you’re making a fair comparison, as some lenders don’t include all of their fees in the calculation.

2. Will the interest rate change over the life of the loan?
In the case of a fixed rate mortgage, the interest rate will remain the same for the entire term of the loan. Adjustable rate mortgages, however, have interest rates that change periodically. If you’re considering an adjustable rate mortgage, make sure you understand what the adjustment period is — that is, how often the rate will change (usually annually). Also, ask what the index and margin are that will determine your rate, and find out what caps will protect you from large rate increases. You can request a chart showing the past performance of the index the rate is based on, which will give you an idea of the rate swings other borrowers have experienced in the past with the same mortgage.

3. Will I be charged points?
A lender may offer to lower your rate if you pay discount points up front. One point is equal to one percent of the principal — two points on a $150,000 mortgage, for example, will cost $3,000, and might lower your rate by 0.5 percent. Lenders may also charge origination points, which are an administrative fee for processing your application and do not affect the interest rate. Make sure you understand which type you are paying for.

4. What are the closing costs and other fees?
Ask each lender for a good faith estimate of their closing costs. (Lenders are required by law to provide one within three days of your application.) Take the time to go through each estimate carefully to be sure you understand what each item means. This is important when comparing offers as lenders sometimes use different terminology for the same item.

5. Will you lock-in the interest rate?
A lender may allow you to lock-in the interest rate and points quoted in your offer for a specific period of time, often 30 to 60 days. This will protect you if rates go up during the time it takes to process your application. Ask what date the lock-in becomes effective and whether there is an additional fee involved — and get the agreement in writing.

6. How will my down payment affect the cost of the loan?
Some lenders require only a very small down payment of 3 or 5 percent, and some even offer zero-down-payment loans. But these may carry significant costs to offset their inherent risk. Typically, if your down payment is less than 20 percent, the lender will require you to pay for private mortgage insurance (PMI). On the other hand, you may be able to reduce the cost of your loan, or at least improve the terms, by making a larger down payment.

7. What documentation do you require?
Lenders will ask you to provide a bundle of personal information, such as your income, employer, social security number, information about your assets and an appraisal of your home. Ask for a checklist so your application is not delayed by missing paperwork.

8. What are the payment terms?
Ask each lender what method of payment they require, such as sending back a coupon with a check or arranging an automatic withdrawal from your bank. Determine whether there is a grace period (typically a week or two), and ask about late payment fees.

9. Can I pay the loan off early?
Chances are you may want to refinance your mortgage before the term is complete. So check whether a lender will charge you a prepayment penalty for doing so. Some may also charge a fee for paying down a substantial portion (more than 20 percent) of the principal before it is due. In many cases, prepayment penalties decline each year, and may eventually disappear.

10. How long will it take to close the loan?
Processing a mortgage application can be time-consuming. Ask each lender how long they expect it will take to review your documentation, check your credit rating and approve your loan. A minimum of two weeks is typical, though it is not unusual for it to take six to eight weeks to close a mortgage.

11. What might delay the process?
Ask each lender what information — employment, marital status, other outstanding debts — they will be checking, and make sure you advise them of any changes in these areas. You can also head off problems by checking your own credit file a couple of months before shopping for your mortgage.

What to do when a lender says no
Take a look at your credit history and debt to income ratio if your loan application has been denied.

It’s not uncommon for prospective home-loan borrowers to receive the dreaded news that their application has been denied. While no one welcomes a lender’s “adverse action” letter, there are some steps you can take to get yourself back on track.

The first step is to relax and not panic. An adverse action letter isn’t a personal attack on you, and it doesn’t mean you’re a bad person or a failure. It may mean that you won’t be able to purchase the home you want or that you won’t be able to purchase a home right away, but it doesn’t mean you’ll never be able to own your own home.

The next step is to review your personal situation and try to find out exactly why the lender declined your application. Was your credit score too low? Was your debt-to-income ratio too high? Was the appraiser’s opinion of the home’s value lower than the sales price? Or did some other problem crop up? It’s important to find out the details because each situation requires a different solution.

Check your credit
If your application was denied due to your credit history or credit score, you should request free copies of your credit reports from either AnnualCreditReport.com or the three credit bureaus, TransUnion, Experian and Equifax. Be sure to get all three reports because adverse information in one report may not necessarily appear in the other two reports.

Loan officers rarely have the time or expertise to sort out individual borrowers’ personal financial situations, so you’ll need to swallow any pride or embarrassment that you may feel and ask a trusted family member, friend or other financial advisor to help you understand your credit report and strengthen your credit score. For more information on credit reports and scores, visit the Credit Section of the LendingTree Smart Borrower Center.

Be wary of anyone who promises to “fix” your credit for a fee. While you certainly can improve your own credit score over time, credit repair services typically can’t do much for you that you can’t do on your own if you put in the time and effort.

Take a hard look at your debt-to-income ratio
One of the reasons your loan application was denied may have been that your debt-to-income ratio was too high. If this was the case, you’ll need to increase your income, reduce your debt or borrow less money. To understand this scenario, suppose you earned $2,000 a month and applied for a loan that required a monthly payment of $900. That debt-to-income ratio of 45 percent might be within the guidelines. But if you also had a monthly car payment of, say, $400 and a minimum monthly credit-card payment of, say, $100, those debts would push your debt-to-income ratio to 70 percent, which would be too high. A monthly debt obligation of $1,400 would leave only an inadequate $600 per month for all of your other expenses.

Borrowers who receive an adverse action letter sometimes try to approach another lender in hopes of a happier outcome. That’s not always a smart idea since a lender that’s willing to be more flexible about your situation probably will offer you a more expensive loan on less favorable terms. That quick-fix may solve your immediate problem, but may not be in the best interest of your long-term financial wellbeing.