In the past, approving a customer for a mortgage loan meant having to verify a borrower’s employment, income and debts. Today it’s much more complicated. Lenders need to be really buttoned up when it comes to making a judgment call on whether a buyer will be able to make timely loan payments and repay the loan in full.
Because of this new level of scrutiny, the number of documents requested when applying for a loan has grown significantly. And some more unorganized lenders out there tend to ask for the same documents repeatedly, frustrating users because, in all honestly, it takes time and effort to track some of this information.
As a prospective borrower, it’s smart to get preapproved before you start house hunting. It’s equally as smart to prepare for your application process by collecting the documentation you’ll be asked for ahead of time. That will speed up your approval process, so you can get out and make a confident bid on a home sooner rather than later and close on it faster.
Gather up these items before applying for a mortgage.
You have to prove you are who you say you are. Like most financial transactions, applying for a mortgage requires proof of identity. You’ll need to provide your driver’s license, your passport or another form of government-issued ID. If you’re not a U.S. citizen, that’s OK. You’re still able to get a mortgage. But you may be asked about your permanent residency status, and you may have to provide a copy of your green card, your Employment Authorization Document or a valid work visa.
To verify your most recent income, you’ll be asked for paycheck stubs (or their electronic equivalent) for at least the last 30 days. Because you could be asked for this again down the road (it happens), it might make sense to keep a file of your paystubs and pull out the most recent whenever asked. If you receive other income, like overtime pay, and it’s separate from your regular paycheck, you’ll want the documentation for that as well. Note that your lender may also want to see a ‘proof of income- letter from your employer, especially if you’ve recently changed jobs or the industry you work in.
Your mortgage lender is looking for job stability and consistency and will need to see W-2 forms from current and past employers. The minimum They’ll need is the past two years, and if you plan to co-own the house, each of you will need to provide this information. If you don’t have them handy, check if your tax preparer has retained any digital copies or reach out to the IRS for copies. Note that if there are gaps in your employment, you’ll be asked for a written explanation. It doesn’t have to be lengthy, but it needs to be an honest assessment of why you were unemployed at that time.
The difference between your overall debt and annual income is called the debt-to-income ratio or DTI. Lenders use this figure to determine if you’ll be able to afford your monthly mortgage payments while still repaying your other debts like auto loans, student loans, credit cards, etc. To calculate this, you may be asked for two to three months’ worth of bank statements (all pages, even blank ones) to verify your income, savings balances, and source of your down payment. If there are any large and recent deposits, be prepared to explain where those funds came from.
RETIREMENT AND INVESTMENT ACCOUNTS.
You’ll also need to dig up several months of statements from any retirement accounts, stock investments, 401(k)s, and CDs (certificates of deposit). Don’t be surprised if the lender doesn’t use the entire amount of those accounts as qualifying income. They may only account for sixty cents on the dollar on the chance you might have to liquidate those accounts to pay future bills.
As a borrower, you’re not expected to source out all your credit reports, but you’ll have to provide the lender with permission to check your credit history. If there are signs of late payments or judgments against you, you may need to explain in writing. The lender will also check your credit score. If you’re new to using credit — or haven’t done so yet — credit scoring companies won’t have enough data on you to give you a score. If that’s the case, you may need to prove that you made regular payments to electric and gas companies, cable and internet access, car insurance, or mobile service. Anything you can provide that shows a pattern of being on time with payments will help. If you are a renter, provide proof of rent payments for the last 12 – 24 months. Letters from landlords can help here, too.
INCOME TAX RETURNS:
Pull together your tax returns from the last two years (at least) to verify income reported as well as deductions claimed. You may also be asked to sign something called a Form 4506-T, which grants your lender permission to request your tax return information directly from the IRS.
If you are self-employed or an independent contractor or freelancer and haven’t yet filed your tax returns for the previous year, you may need to provide a profit-and-loss statement. This is more common since the COVID-19 pandemic may have interrupted some of your workflow. A P&L statement can be generated with accounting software like Quicken or Quickbooks. Or you can create your own with a spreadsheet that details gross income from the previous year, minus all your operating expenses. Include things like computer equipment, software licenses, office supplies, rent, telephone, and travel costs if they’re related to doing business. Ask your lender what format is preferred. Oh, and of course you’ll need to provide several months of 1099’s.
ALIMONY OR CHILD SUPPORT:
If you are legally divorced, your divorce decree will detail any alimony or child support payments you need to declare. You may need to provide a copy of the decree along with bank statements showing that payments are regularly made. If you’re legally separated (not divorced), you may have to supply your separation agreement, so it’s a good idea to have it on hand, too.
If you’re thinking of using gifted money, a gift letter will be required. This is precisely what it sounds like: a signed letter from someone with a relationship to the homebuyer who plans to provide cash to cover part or all of the down payment. Important: The letter must state that the recipient is not expected to pay it back. Your lender may also request proof from the donor’s bank showing the funds’ source is perfectly legit.
Be organized before applying
Our best tip here is to start a file collecting all these materials before applying. If nothing else, make sure you do it long before finding the home you want to buy. This way, when your lender asks for specific documents, you’ll be able to produce them quickly. The last thing you want is to lose out on the home of your dreams because you can’t locate some essential paperwork.