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We're in the initial stages of looking to downsize. The price of the new home is expected to be close to our current home (no mortgage), with the latter expected to sell quickly, so a short period between the purchase and the sale - and I would want to do it in that order - during which we are thinking of taking out a home equity loan.

Can someone outline generally speaking what would be required to qualify for a loan? I know they will do a credit bureau check and will ask for income statements, but do they usually ask to see everything or is there a rule of thumb as to what would be enough income and assets for a given loan amount? I don't like to give out personal information unnecessarily.

So let's say for argument's sake that we would want to borrow $300K, what would the bank want to see (taking account of the ~$350K equity in the house we will be selling)? This is in U.S.

Thanks.

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    A home equity loan is a loan against a property you already own. A home purchase loan is a loan on property that you are newly acquiring. Are you sure that "home equity loan" is what you mean?
    – Istanari
    Sep 22 '20 at 23:13
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    I would use the home equity loan to purchase the new house (which I believe to be simpler than applying for a mortgage) and then when my current house sells I would repay the loan, so a kind of bridge loan for the period between the purchase and the sale. Sep 23 '20 at 0:48
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Realistically, you're going to need to show them everything. The bank isn't going to give you $300k without a pretty complete accounting of your financial position. There isn't going to be a lot of personal financial information that you're going to be able to keep away from the bank.

When you fill out the paperwork to apply for the loan, one of the forms you'll fill out requires you to confirm that you've supplied information about all your income, assets, and liabilities. Intentionally holding back information is only going to raise suspicions. Almost certainly, the bank will require tax transcripts from the IRS that show your income over the past few years to ensure that you have the income to pay back the loan. That's going to give them a pretty good map of where most of your assets are. They're going to require a credit report that will show most of your liabilities. If they see that you've reported thousands of dollars in dividends and capital gains from an account at Bob's Discount Brokerage and you don't provide a statement from that account, the underwriter will likely ask about it. If there are open accounts on your credit report that you haven't provided statements for, the underwriter will also ask about that. And once the underwriter has to start asking about missing accounts, they're likely to get more picky about your application than they would have if you had provided everything up front.

Most of the time, when people fail to list a non-trivial financial account, income source, or liability it's because they're trying to hide something. For example, an applicant might want to hide the fact that they have a large margin loan at Bob's Discount Brokerage or that they've got a large source of income that doesn't show up in their tax returns that is related to some illegal activity. Banks can be liable if they don't do their due diligence in detecting money laundering or if they misrepresent the borrower's debt-to-income ratio to the (usually government) entity that buys the note and/or the mortgage so they're going to need to see your full financial position.

As for why banks are going to ask for IRA statements when you have "enough" assets already documented, it comes down to product qualification and efficiency. Mortgage banks in general tend to have a lot of different mortgage products available. It's not a simple "thumbs up"/ "thumbs down" decision-- different mixes of assets, income, and liabilities may end up getting approved for different programs with different rates or fee structures (for example, there are a number of different appraisal waiver programs that can reduce or eliminate the appraisal fee). When the computer runs through the options and tells your mortgage broker or loan officer what you qualify for, it generally has no way of saying that you could have qualified for a slightly better program if only one of your ratios was better. So your broker/ loan officer is going to want information on all your assets to make sure they can offer you the best deal (particularly if you are shopping around).

One of the efficiency metrics that every mortgage company is going to track is the number of times that a file needs to get touched. It takes an underwriter (or a loan officer, a closer, or anyone else) a decent amount of time to pick up a loan, figure out what needs to be done, and do it. If the underwriter doesn't get all the information they need up front-- say, they see a recurring $400 transfer from your checking account every month that you say is going to an IRA but they don't see a corresponding IRA statement proving that those are IRA contributions and not payments on an undisclosed liability-- then the underwriter has to go back and ask for them. When you upload those documents a day or two later, a different underwriter may pick up the file and will have to figure out where the first one left things in order to clear the condition. That takes time which costs the bank money (and means that everyone pays slightly higher rates) so the broker/ loan officer will want to get everything up front. It's far better from their standpoint to have statements that no one ends up needing than to have the underwriter come back later asking for additional information.

On the positive side, though, since mortgage banks have to collect such extensive financial information, regulators and banks take privacy very seriously. Nothing can completely eliminate the risk that your personal information will be misused. But mortgage banks are among the safest custodians of your personal information that you're going to find. A large mortgage bank is getting audited constantly by state and federal officials and is almost certainly retaining third party auditors to ensure that its policies meet all the data privacy laws and to attack their systems to ensure they don't have any vulnerabilities.

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  • They said they might also check IRAs. How would that be relevant, assuming more than sufficient assets in taxable accounts? Sep 25 '20 at 18:13
  • @Not_Einstein - Various reasons. If there are regular contributions, the underwriter is going to want to see that debits from your checking account match the contributions to the IRA to prove that they're not really payments on a liability you haven't disclosed. Mortgage banks also have a lot of different programs so having more assets than is strictly necessary might let you qualify for a different program or skip a fee. And from an efficiency standpoint, it's faster to ask up front for everything and possibly not need something than to need something, not have it, and ask for it. Sep 26 '20 at 13:19
  • Learning a lot here, thank you. One more question - suppose one is paying for a house out of pocket i.e. no loan so no qualifying document from the bank. I believe the seller still expects some financial disclosure from the buyer so as not to take the house off the market unnecessarily. How extensive is that disclosure? Or, is that the purpose of the up-front money given to the seller with the offer to buy (I think it's usually a non-refundable ~3% of the sale price)? Sep 27 '20 at 16:00
  • @Not_Einstein - I suppose a buyer might ask for some sort of disclosure but that would be very much up to the buyer and wouldn't be standardized. Normally, the earnest money (the term for the deposit a buyer provides up front) and the signed contract are enough to cover the seller. If you're getting a loan, you're not disclosing anything to the seller, just to the bank since they're giving you a 6 figure check. From the buyer's perspective, they have no more need for financial disclosure if you're trying to get a loan than if you're paying in cash. Sep 28 '20 at 6:21
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So let's say for argument's sake that we would want to borrow $300K, what would the bank want to see (taking account of the ~$350K equity in the house we will be selling)?

Most lenders will allow you to borrow up to 80% of the value of the house. That would put the maximum amount they will loan you at about 280K. Some will go higher but that could require a higher rate and PMI.

You are asking for a loan, they will want to know that you can afford it, and that the house is worth it. That will require you to prove your income, and document your obligations. They will require an appraisal because they need to know how much it is worth to be able to determine how much of a loan they will approve.

Do all of this before you put the house on the market. They will ask a lot of questions if the house is already on the market. That is because they know you will only have the loan for a short period of time.

Because you are getting a mortgage for the old house, and many others are refinancing due to the low interest rates, it can still take a considerable amount of time to get the mortgage.

You do have two other options.

  • A bridge loan but they have higher rates and fees, because the lender knows it is a short term loan. But your scenario is normal.

  • Get a mortgage on the new house. Then once you sell the old house decide if you want to keep the mortgage on the new one or pay it off. That is an option you wouldn't have with the one you included in the question. You have to pay off the mortgage on the old house when you sell, but if you have a mortgage on the new house you could invest the proceeds from the old house.

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