Applying for a mortgage takes more than just a few sheets of documentation. Lenders require paystubs, W2’s, tax return and more. Now that you’ve determined now is the right time to buy a home, see how you need to prepare when applying for a mortgage.
Previous Two Pay Stubs
Your mortgage lender wants to make sure you’ve held your job for a consistent amount of time when applying for a mortgage. If they see a consistent pattern, they can determine a loan amount. If they see frequent movement, they will require additional documentation to understand the path. For those who are self-employed, your lender may require documentation to help verify your source of income.
Previous Two Year’s W-2 Forms
A W-2 form shows a person’s income and how much was taken out for taxes. This form is important because it verifies your salary, and can affect your total income level. This can help your lender calculate a loan approval amount when you’re applying for a mortgage.
Previous Two Years’ Tax Returns
The main reason lenders need tax returns is that it shows a history of past income (while a W-2 shows current income). The tax return can be assessed against a W-2 to help paint a picture of your financial situation for your lender.
2-3 Months Banks Statements
Banks statements show activity of exactly what’s going in and what’s going out of your savings and checking accounts. If there is a large deposit in your bank account, your lender is going to request documentation of the deposit. If you have a gift fund going into your account, your lender will need to see documentation on both the giver and receiver’s side.
Statement of Assets
Your lender will need to verify that you have enough cash in your savings accounts to cover any out-of-pocket closing costs and at least two months’ worth of mortgage payments. Accounts such as savings accounts, retirement accounts, stocks, bonds, and certificates of deposits will provide proof of any additional assets you own in addition to your regular salary. Remember, the more income you have (from any account), the more your lender is willing to lend when you’re applying for a mortgage!
Even though your lender will run their own credit score, it’s smart to run your score yourself in advance. Credit Karma is a free app that gives a good estimate of where you stand. Running your score beforehand will allow you assess where you stand and take care of any red flags. This gives you the chance pay down your account balances, and get rid of any extra credit cards you don’t need. The higher your credit score, the better the interest rate for you when applying for a mortgage!
Information on Debts
Providing information of debts such as car loans, student loans, and credit cards will also contribute to the total income picture for your lender. The amount coming in assessed against the amount going out of your savings every month is called the loan to income ratio. The standard rule for lenders is that the monthly housing payment should not take up more than 28 percent of your income before taxes. For this reason, it’s also best to wait until after you’ve received the keys to your new house to open any new credit cards. Opening new accounts can cause a delay or even terminate a mortgage loan.