Why does a mortgage lender require so much information?
When you apply for a mortgage it can feel like you are being audited for your taxes or even interrogated. A FREEandCLEAR mortgage survey showed a majority of borrowers compared getting a mortgage to going to the dentist and highlighted how applicants feel overwhelmed by mortgage paperwork.
Mortgage lenders require extensive information and documents for two reasons. First, they use this documentation to verify the information you submitted on your loan application. A mortgage is a lot of money so the lender needs to document that your application information is accurate. Second, they require the information because they are legally required to do so.
Your mortgage application requests comprehensive information on your income, assets, debts, employment and residence history. You are required to submit how much money you make, where you work, how much money you have in the bank and investment accounts and detail your loan obligations and monthly payments.
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While the vast majority of mortgage borrowers provide valid information on their loan application, lenders are required to obtain documentation to verify the information you provide. The list below outlines some of the information you may be required to provide when you apply for a mortgage:
To confirm your income, lenders review your pay stubs, W-2s and tax returns.
To verify your monthly debt payments, they review your loan statements and credit report.
The lender also requests a verification of employment to confirm your current employer and job status.
To confirm your savings and investments, lenders review your bank and brokerage account statements. Additionally, depending on the type of investments you have and your ownership interest, the lender may request additional documentation related to funds, partnerships or companies in which you are invested.
If you own rental or investment properties, the schedule E from your tax returns that shows your income or loss.
If you are receiving a gift to help pay for all or part of your down payment, you are required to provide a gift letter and in certain circumstances the lender may request additional financial information from the individual providing the gift.
If your application includes a unique circumstance such as a credit challenge, you may be required to provide a letter of explanation that addresses the issue.
If you owe or receive alimony or child support payments, lenders request a copy of the applicable divorce or separation agreements.
Self-employed applicants may be required to provide additional documentation including business licenses, corporate tax returns, company profit and loss (P&L) statements and company bank account statements, depending on your loan program.
If you are refinancing your mortgage, you are required to provide your current mortgage, property tax and homeowners insurance statements.
All of the documents outlined above are used by the lender to make sure that the information you provide on your mortgage application is valid and up-to-date. The lender also uses this information to confirm that you qualify for the mortgage and are able to make the monthly payment and repay your mortgage over time.
State and federal regulations also require that lenders keep your mortgage information for a specified period of time. If something happens with your loan, for example if you default on your mortgage, the lender uses the documentation to confirm that your application was accurate and that you qualified for the mortgage.
Additionally, if a legal dispute arises, the documents provide a paper trail that shows that the lender acted properly when it took your mortgage application. In a worst case scenario, if you lied on your loan application or intentionally provided misleading information, the documents can potentially be used to investigate mortgage fraud.
To summarize, mortgage lenders require all of your information to verify your loan application and to comply with lending laws and regulations.
Sources
"B3-3.5-01, Income and Employment Documentation for DU." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
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