Mortgage applicants expect to be asked to prove their income, verify their employment and provide permission for their tax returns to be reviewed, but these days, lenders frequently demand more and more answers to questions that may seem out-of-bounds to borrowers.
Questions about exactly where every dollar comes from in your bank account may seem excessive, but lenders must document everything about an applicant's finances in order to prove to underwriters that the borrowers will repay the loan.
- The types of questions mortgage lenders can ask applicants has changed over the years and the current group of questions may seem to be more invasive than what some borrowers are expecting.
- Applicants are likely expecting questions about job history, income, assets, debts, and credit history, as these types of inquiries are common.
- But mortgage lenders are also legally allowed to ask about an applicant's ethnicity, marital or divorce status, and whether the applicant is part of a lawsuit.
- Certain topics remain off-the-table. Lenders are not allowed to ask if you are planning to start a family. Lenders are also not allowed to inquire about the status of your health.
Questions You Should Expect From a Lender
Most lenders want to see a two-year history of employment and will need a contact where your job can be verified. In some cases, lenders can ask to see your diploma or college transcript in order to verify that you were in school when you said you were.
Typically, two recent paystubs are required, but some lenders will also require tax returns, particularly if you were self-employed. Discrepancies in income can trigger extra questions, especially if your income has declined for some reason such as a reduced bonus or commission. If you receive child support, Social Security or some other payments other than wages, you'll need to provide documentation that the income will continue.
Lenders want to know where your assets have come from in order to ensure that you are not borrowing money from someone for the down payment. Gift letters are required and must meet lender restrictions if you are getting help for your home purchase.
Your debts will show up on your credit report and will be calculated as part of your debt-to-income ratio. It's a good idea to review your credit history before applying for a mortgage because any disputed debts or debts that you believe have already been repaid will require proof and may need to be erased from your credit report before you can qualify for a loan.
Your credit score is an important part of your loan application, but lenders will also look at your report to check for credit inquiries and past credit problems. If you have a number of recent credit inquiries, lenders may ask if you have taken out other loans or new credit cards that have yet to show up on your report.
Unexpected Lender Questions That Are Still Legal
In order to avoid discrimination based on someone's ethnic background, the Department of Housing and Urban Development (HUD) actually requires lenders to ask about borrowers' race. HUD can then review lender records to make sure they aren't routinely turning down minorities or charging them higher fees.
While it may seem like a lawsuit, especially if you are the plaintiff, should not impact your home financing, lenders always require applicants to ask if they are involved in a lawsuit because of the potential cost and the possibility of a judgment that goes against the borrower.
Lenders are particularly concerned about the financial details of a divorce because of the possibility that a borrower could be held responsible for an ex-spouse's debt. In addition, if you are trying to include child support or alimony as income on your loan application, a lender will need some hard proof that the income will continue.
Questions You Can't Be Asked
While it may seem that a lender can ask a borrower anything, there are two topics that are forbidden for lenders to investigate: family planning and health issues. According to HSH.com, under the Equal Credit Opportunity Act, lenders are not allowed to ask if you are planning a family.
In the past, this question was used to discriminate against female borrowers because lenders assumed women would quit work when they became pregnant. You can, however, be asked about how many dependents you have and about your marital status, because that is information that can be used to qualify you as a first-time homebuyer and for special loan programs that have income limitations.
Under the Fair Housing Act and the Americans with Disabilities Act, lenders are prohibited from discriminating against borrowers who are ill or disabled, so they are not allowed to ask you any questions related to your physical condition.
What Should You Not Do When Applying for a Mortgage?
Mortgage lenders want to know that you'll be able to consistently pay back your loan. So engaging in any financial behaviors that give the impression that you might have problems paying back your loan are not advised. Specifically, don't change jobs or become self-employed, buy a new car or take on any other kind of long-term debt, open new lines of credit or fall
behind on any payments, co-sign a loan for anyone, or in any way misrepresent your financial situation.
Can a Lender Ask If You Are Having Medical Issues?
No, a lender is not allowed to ask about the status of your health. It's one of the few topics that are illegal to mention, along with whether you are planning to start a family.
Why Do Mortgage Lenders Need Tax Returns?
Mortgage lenders ask for tax returns, often two years, to verify that you have the income, investments, and other holdings that you say you do. Mortgage lenders will also ask for proof of employment and salary, as well as retirement holdings.
The Bottom Line
Every borrower today needs to be prepared to answer almost anything a mortgage lender asks, but if you feel you are being asked inappropriate questions you should ask your lender some questions in return and perhaps find another lender.