No-documentation-mortgage loans have disappeared from the financial world; but if you haven't applied for a mortgage in years, you may be surprised at just how far the pendulum has swung. These days, you'll need to provide paperwork for nearly every dollar that goes in or out of your bank account.
Normally, you'd think that any additional income would boost your chances of a home refinance and qualifying for the best mortgage rates, but if the origin of the money is anything other than your usual paycheck, you'll face additional scrutiny.
Refinance application tips
The researchers at HSH.com say that deposits of even as little as $100 can require a stream of explanations and paperwork to prove that you aren't laundering money, accepting help for closing costs or are having financial problems. Try these steps to make sure your refinance application isn't derailed.
- Avoid making non-payroll deposits. If you have a yard sale, sell old clothes on eBay or sell your car, you might think that's a smart move to gather funds for your refinance costs. Unfortunately, a mortgage lender may decide to disqualify your mortgage application unless you can provide documentation of the sales transaction beyond a simple letter of explanation. In addition, if your income barely allows you to qualify for the mortgage loan, your lender may assume you are scrambling to put together enough funds for the transaction.
- Keep copies of every deposit slip, pay stub and bank statement. Be prepared to document every transaction for as long as three to six months before your closing. If you intend to apply for a mortgage refinance, be vigilant about every deposit and expenditure so you can prove where the money came from and where it has gone.
- Don't deposit cash. It's difficult to prove where the cash comes from; so if you can do it, hang on to your cash until your refinance has gone to settlement. Lenders may be suspicious that you're depositing an unauthorized gift or a loan that must be repaid or, worse, a credit card cash advance. If you have to deposit cash, be sure you have a receipt that shows where you got the cash.
- Avoid transferring money from one account to another. If you transfer money from one account into your checking account, you'll have to provide the paper trail for the original account as well as your checking account. Even if you can document deposits to every account, the process could slow down your mortgage application approval.
- Don't open new accounts. While you may know not to open a new credit card account or take out a car loan since that could skew your debt-to-income ratio, it's best not to open any type of new bank account during the refinance process because you would need to establish new documentation about the funds for that account.
Keep in mind that normal payroll deposits and normal monthly expenditures are not likely to demand extra documentation, so the main thing is to avoid doing anything unusual financially while applying for a mortgage refinance.