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When you apply for a mortgage, expect to be asked to prove your income, verify your employment, and provide permission for your tax returns to be reviewed. Lenders frequently ask questions that may seem out-of-bounds, but they are in fact legal and necessary for them to evaluate you as a borrower.
For example, questions about exactly where every dollar comes from in your bank account may seem excessive. But mortgage lenders must document everything about your finances to prove to underwriters that you can repay the loan.
Key Takeaways
- Mortgage lenders can ask applicants a range of questions about their finances.
- Lenders often want to learn more about your income, assets, debts, and credit history.
- Mortgage lenders are also legally allowed to ask about an applicant’s ethnicity and marital or divorce status.
- One question a lender may ask is whether you are part of a lawsuit.
- Lenders are not allowed to ask if you are planning to start a family or ask about the status of your health.
Typical Questions from Mortgage Lenders
Income
Lenders need to ensure you have enough regular income to reliably make your mortgage payments. Typically, lenders require at least two recent paystubs to prove your income, but some lenders will also require tax returns, particularly if you are 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.
Job History
Most lenders ask about your recent job history to evaluate whether your income will be stable. They typically want to see a two-year history of employment and will request a contact to verify what you say about your employment. In some cases, lenders can ask to see your diploma or college transcript to verify that you were in school when you said you were.
Assets
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.
Debts
Your debts will show up on your credit report and will be calculated as part of your debt-to-income ratio as well as your housing expenses ratio.
Consider reviewing your credit history before applying for a mortgage. Check whether you want to work on reducing your debt before applying. Also look for any errors in your credit report and report them immediately.
Credit History
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.
You can order a copy of your credit report from the three main credit bureaus through AnnualCreditReport.com. You are entitled to one free copy of your credit report each year.
Other Lender Questions That Are Legal
Mortgage lenders may also ask questions about you that go beyond your finances. Some of these questions are legal while others are not. Here are some topics lenders can legally ask about:
Ethnicity
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 the lender isn’t routinely turning down minorities or charging them higher fees.
Lawsuits
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 you could face. These costs could affect your ability to pay for a loan.
Divorce
Lenders are particularly concerned about the financial details of a divorce because of the possibility that you could be held responsible for an ex-spouse’s debt.
If you are trying to include child support or alimony as income on your loan application, a lender will need proof that the income will continue.
Other Lender Questions That Are Not Legal
While it may seem that a lender can ask anything, there are two topics that are illegal to require borrowers to answer: family planning and health issues.
Lenders may not ask if you a starting a family because they may assume female borrowers will quit their jobs if they become pregnant. They could use the answer to discriminate against borrowers who plan to start families.
Under the Equal Credit Opportunity Act, lenders are not allowed to ask if you are planning a family. 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 questions related to your physical condition.
If you believe you’ve been the victim of discrimination by a lender, you can report them to the Consumer Financial Protection Bureau (CFPB) and/or consult an attorney for guidance.
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, during the mortgage application process, avoid changing jobs, making a major purchase or taking on other debt. Don’t fall behind on any payments, co-sign a loan, or 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
Be prepared to answer what a mortgage lender asks, but if you feel a lender is asking inappropriate or illegal questions you should ask your lender about the purpose of the questions. Or you may want to work with another lender. In general, detailed questions about your finances are an important and common part of the mortgage process.