When you get ready to purchase a home, there are certain documents that the mortgage lender is going to need from you. Having these ahead of time will speed up the lending application process.
In January 2014, the ‘Ability to Pay Rule’ went into effect. This rule requires mortgage lenders to prove a borrower can afford a mortgage before issuing a loan to them. Sadly, this was not the “norm” back in the early 2000’s.
Why This Rule Was Put Into Effect
In the early and mid-2000s, lenders often gave out mortgages without verifying whether the borrower could actually afford it. Lenders regularly skipped verifying the borrower’s income and, in many cases, offered low initial “teaser” interest rates that would eventually adjust and lift the monthly payments to an unaffordable level. This contributed to the mortgage crisis and led the country into recession.
The Dodd-Frank Act Imposes New “Ability to Repay” Rule
In response to the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave the authority to both implement the new requirements of the Act, as well as adopt new rules to protect consumers in mortgage transactions. In part, the new rules set out an “ability to repay” (ATR) requirement for virtually all closed-end residential mortgage loans. (A closed-end loan is a loan that must be repaid in full by a specified date.)
- Pay Stubs
- Bank Statements
- Tax Returns – 1 to 2 years of both business and personal
- Proof of Legal U.S. Residency if not a U.S. Citizen
- Proof of Military Service
- K-1 and Business Tax Returns for Self-Employed
- Sources of Funds
- Gift Letter
- Alimony or Child Support Documents
- Proof of Reserves
- Cancelled Rent Checks