It sounds like this couple will pass the smell test for a mortgage without any problem. And that's a problem, says Todd Huettner, a mortgage broker based in Denver. "You have to have good credit to get a loan, but having good credit won't get you a loan," he says.
In other words, it's not enough these days to have a credit rating above 740 to refinance to buy a home. "Now, it's just a starting point," he says. "You have to have really good credit. But it's not a done deal if you do."
Huettner and other mortgage brokers say that they are spending a lot of time explaining to clients what else they need to have in order to prove to lenders that they are credit-worthy.
Steven Slotnick, a mortgage broker at Prospect Mortgage, based in Maplewood, N.J., says that the most difficult part of his job right now is obtaining the documentation that is required to verify a client's income and assets. "I am now asking borrowers for two years of complete tax returns," he says. "If someone comes in with a good credit score, that's wonderful. They will get a better rate on their loan. But they still need to qualify. And in order to do that, I need to fully document their income, and scrutinze their assets."
Slotnick and Huettner have both run into situations where they found, while going through tax returns of clients with stellar credit, issues that create problems on the loan application. While the key, both say, is to have good documentation, there are some instances where a loan won't be approved -- at least not at the rate the client would like -- until some issues are resolved.
One of the biggest problems Slotnick faces is getting full documentation of assets. The issue is an especially big one for clients who are independent contractors. "If someone works in a cash business, and makes large cash deposits, we will need to look at those receipts. We need to know where the money came from, and what account it went into. The better records you keep, the better chance you have of getting a mortgage loan approved."
In the case of a couple that was using cash they received as wedding gifts, he made sure the marriage certificate was part of the application, to prove where the cash came from.
"It used to be, the lender verified your employment by looking at a W-2, looked at your credit score, and your assets," says Huettner. "If the numbers were good, you got a loan. Now lenders are going by the rules. They are not just verifying that you are employed, they are looking at your tax returns to look at your income."
One couple that Huettner worked with had both recently changed employment status within the past year, when both became independent contractors. "They had perfect credit, a ton of assets, but, in the eyes of a lender, they were a risk, because their income was now considered inconsistent. I told them to wait at least a year to apply."
Scrutinizing a tax return might reveal that you have a second home, which you use as a rental property. If you have written off expenses related to that property, a perfectly legal practice, it could lower your income. And suddenly, you are making less than you thought you made, at least on paper. But that is the paper that counts.
"Pulling tax returns is opening a Pandora's Box," says Huettner. "But if you know this upfront, you might be able to work out problems." The key, however, is to have all the documentation at the ready.
"I don't take applications anymore, I take documentation. I ask for pay stubs, W-2s, asset statements. I need to know what on there, and then we will build the application together. If your lender is not asking for tax returns and bank statements, that's a big red flag. It's not fun, but it's a huge requirement."
"We are all asking the same questions," said Slotnick. "It's not so much that it's difficult to get a mortgage, but it is definitely more cumbersome."