Reader question: “What kinds of questions will the mortgage lender ask me when I apply for a home loan?”
The lender will ask a variety of questions relating to your employment, income, assets and debts. Basically, if it has to do with your financial situation, the lender will probably ask about it.
They do this to determine two things: (1) How much of a risk do you pose, as a borrower? (2) How much of a loan can you realistically afford to take on, give your current debt and income situation?
Expect More Questions Today Than in the Past
If you’ve been through the mortgage-application process before, but it has been a few years since your last loan, you may be surprised by the number of questions the mortgage lender asks you. You may also be surprised by the number of documents they request.
Why do lenders ask so many questions these days? Two reasons:
Risk aversion. Banks, credit unions, and mortgage companies are more risk-averse today than in the past. The global financial crisis (which, in many ways, began in the U.S. mortgage and housing market) forced lenders to minimize risk by limiting access to credit. Translation: It’s harder to get a home loan these days, due to the mess we just went through. This is one reason why mortgage lenders ask more questions today.
New rules. Over the last few years, the federal government has introduced a series of new rules and regulations for the lending industry. Some of these rules have already taken effect, and some will take effect in January 2014. The Qualified Mortgage (QM) rule and the Ability-to-Repay (ATR) rule are two prominent examples. Both of these require lenders to perform due diligence when screening borrowers. This translates into more documentation, and more questions asked of each borrower.
Types of Questions the Mortgage Lender May Ask
So, what kinds of questions will the mortgage lender ask when you apply for a home loan? Below, you will find a list of some of the most frequently asked questions, organized into four categories: (1) income and employment, (2) debts, (3) assets, and (4) borrowing history.
1. Questions about your current income and employment:
- Where do you work?
- How long have you been at your current job?
- How much do you earn each month, before taxes?
- Do you have any other sources of income?
Why they ask: Your employment and income are important for obvious reasons. The lender wants to make sure you have the financial means available to repay the loan obligation. So they will look into your current employment situation, your gross monthly income, and similar factors that relate to your financial means. The mortgage lender will ask many questions relating to your income situation. They’ll also request supporting documents, such as pay stubs, bank statements, and possibly a Verification of Employment (VOE) form.
2. Questions about your current debts:
- How many credit card accounts do you currently have open?
- What are the limits and balances of each card?
- Do you make a car payment? If so, how much is it? How many more payments do you have?
- What other recurring debts do you have? Personal loan? Student loan?
- Do you currently pay child support and/or alimony payments each month?
- What will your total debt-to-income (DTI) ratio be, once you take on a mortgage loan?
Why they ask: The mortgage lender will ask questions about your debts for similar reasons to the income questions. They want to know how much of your monthly income is going toward your debts (including credit card payments, car payments, personal loans and the like). If you have too much debt in relation to your gross monthly income, you might not qualify for a mortgage loan. The lender will ask many questions and request many documents to assess your debt-to-income ratio.
3. Questions about your assets and cash reserves:
- How much money do you have in the bank right now?
- Do you have enough to cover your down payment and closing costs?
- Do you have enough to cover the first two (or more) months of mortgage payments?
- How long have the funds been in your account? Are they sourced and seasoned?
Why they ask: Asset verification is a key part of the mortgage-application process. Lenders will ask questions about your current assets to determine how much you are able to borrow. They also need to ensure you have enough money in the bank to cover your down payment and closing costs. For home buyers, closing costs can easily add up to thousands of dollars. In addition to asking questions about your assets, the mortgage lender will request account statements and other documents to verify your assets and cash reserves.
4. Questions about your credit and borrowing history:
- Have you had a mortgage loan in the past?
- Did you make all of the payments on time, and in full?
- Have you ever missed payments on a loan in the past (delinquencies)?
- Have you ever defaulted (stopped paying) on a loan in the past?
- Have you ever filed for bankruptcy?
- Have you ever been foreclosed upon by a bank?
- Have you ever had a credit account sent to collections?
- How well have you repaid your debts in the past?
- What is your current credit score?
Why they ask: Much of this information can be found within a consumer’s credit reports and scores. These are just some of the many documents mortgage lenders will review when considering you for a loan. If your credit file is clean, the lender might not ask any credit-related questions at all. If you have some credit “skeletons” in the closet (delinquencies, debt collections, bankruptcy, etc.), the lender will probably ask a series of follow-up questions about them. You might even have to provide some written statements explaining those issues. The lender wants to know how much of a risk you are, as a borrower. They do this, in part, by looking at your credit history.
Documentation the Name of the Game
Your mortgage lender will ask you a lot of questions when you apply for a loan. They’ll also request a wide variety of documents to verify the information you provide. They won’t take your word for anything. You must support your statements with documentation.
For example, they will request W-2 forms and tax returns to verify your income. They will request bank statements to verify your assets and cash reserves. They will pull your credit reports to see how you have borrowed and repaid money in the past.
So it’s not like you’re going to have a long interview process, where the lender asks one question after another. Most of their questions will be answered by the mortgage documents you provide.
It’s also important to note that this is a two-way process. The mortgage lender will ask many questions about your financial situation, including your income, assets and debts. But it goes both ways. As a borrower, you should have a few questions for them as well:
- Ask them about the full cost of the loan, including the interest rate and closing costs.
- Ask about the different types of mortgage loan products and programs they offer, and the pros and cons of each.
- Ask about the options you have for “buying down” your interest rate with discount points.
You’ll need to answer the mortgage lender’s questions to get approved for the loan. You should ask plenty of your own questions to make sure it’s the right loan for you.