Buying a home is a difficult process and there is a lot that goes into it. There is no exception when it comes to the loan approval process. Prior to 2007, it was common for homebuyers to be approved for loans with almost no documentation being provided, and this is often considered the primary catalyst to the global financial crisis that peaked in 2008. Since then, requirements for approval for a home loan have become stricter significantly. Your mortgage provider will need a lot of documentation to get your approval. Here are the basics that you can expect your mortgage provider to ask for.
PROOF OF INCOME
Your mortgage provider is going to want to know that you will have sufficient income to be able to repay any loan amount they approve you for. There are many documents that may be needed or requested when it comes to verifying your income, but common documents include:
- Your previous year’s tax return.
- Your previous year’s W-2 forms.
- Your most recent pay stubs (covering at least the last 30 days).
- Profit and loss statements from your business if you are self-employed.
- 1099 forms if you work on a contracted basis.
You will also need to show proof of any earnings you receive outside of your regular job, if you wish to have the income considered as part of your overall income for repayment calculation. Examples of other forms of income that can be used include:
- Child support payments received.
- Alimony payments received.
- Income received from rental properties owned.
- Stock ownership.
PROOF OF EMPLOYMENT
Your mortgage provider is most likely also going to ask for a list verifying your current and former employers for at least the last two years. This document will need to include each employer’s name, mailing address, and phone number. The mortgage provider may also look at the type of industry each employer falls under to make sure that your employment history falls under the same type of industry. A recent switch to a new employer in a new industry may indicate instability of employment to your mortgage provider.
Simply providing proof of income is not going to be enough for your mortgage provider to determine that you will actually be able to repay the amount of money they are approving you for on the loan. Your mortgage provider will also need to take into consideration any debts you already have that need to be repaid and deducted from your overall income, so they know how much remaining income you will have available to actually pay the new loan.
Your mortgage provider will likely ask you to put together a complete list of any debts that you have, along with a breakdown of balances and the minimum monthly payments for each debt. Common debts include:
- Credit cards.
- Student loans.
- Car loans.
- Alimony payments that you have to make.
- Child support payments that you have to make.
It doesn’t matter how large your income is if your debt-to-income ratio is too high. Your debt-to-income ratio will significantly impact your credit score and if you seem to be spending beyond your means, then you will not likely qualify for the lowest interest rates on your mortgage loan. It is best to pay off and minimize as much debt as possible when you are looking to buy a home.
Your mortgage provider is also going to ask you to put together a list of any assets that you have available and their current value to make sure that you have enough resources and savings to weather any unexpected expenses that may occur after you have been approved and have closed on your home. Common assets that are included on this list are:
- Bank statements for both checking and savings accounts.
- Personal investment records.
- Retirement account records.
- Any other owned real estate such as rental properties or vacation homes.
- Auto titles.
- Any other investments that make up a large part of your personal financial picture.
Your mortgage provider may also want you to show proof that the money for your down payment came from your personal savings, and not from another loan. If you received money from someone else to help you with your down payment amount, your mortgage provider will likely ask you to provide documentation stating that the money was a gift provided to you and not a loan that you will need to pay back.
DOCUMENTS RELATED TO YOUR CREDIT CHECK
Your mortgage provider will require your authorization to run your credit report, and then may require additional documentation depending on what is found in the credit report. Situations that could require additional documentation include:
- Letters of explanation for any credit inquiries, past addresses, and derogatory information on your credit report.
- Discharge papers for any bankruptcy you have had within the past seven years and proof that you have settled your debts since.
DOCUMENTS RELATED TO YOUR CURRENT RESIDENCE
Your mortgage provider will want to see verification of your current residence and documentation related to your time spent there. If you currently own your home, your mortgage provider will want to know what you will be planning to do with your current home. If you are planning on selling your current home, you will need documentation from the listing for the home and the sale of your home will need to close before you will be able to close on your new home. If you are planning on renting your current home out, you will need to show documentation related to the rental such as a lease agreement and most mortgage providers will require proof of payment history on the home.
While the requirement of all of this documentation may seem like a lot and be a bit overwhelming, your loan processor will work with you to make the process as easy as possible and you will be on your way to enjoying your new home in no time!