You are ready to buy a home – congratulations! Before you do, you’ll need to get yourself approved for a mortgage. This step is one of the most important steps you’ll take in this process, as it will determine how much the home actually costs you in the end.
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In order to get a mortgage, you’ll need to provide your lender with a large amount of paperwork. The more documents you have ready at the onset of the process, the faster the mortgage process can go for you.
You will need to provide your lender with a variety of income documents. This is what the lender uses to verify that you actually make what you say you make. For example, if you say that you make $50,000 per year, but you don’t have the documents to back it up, the lender can’t use that income.
In order to prove your income, you’ll need the following at a minimum:
- Paystubs covering the last 30 days
- All W-2s from the last two years (even those from jobs you no longer hold)
- Tax returns with all schedules from the last 2 years
- Contact information for your current employer
Typically, you only need to provide your tax returns if you are self-employed or more than 25% of your income comes from commission.
If you are buying a home, you must prove to the lender that you have the money saved for the down payment and the closing costs.
You’ll need to provide all pages of any bank accounts that you will withdraw money from for the purchase. You can use money from any liquid account. Typically, you’ll need the last two months’ of statements to prove that you have the funds.
Keep in mind, if there are any large deposits made during the last two months’, lenders consider them unseasoned. This means that they will need to verify where the funds originated. In other words, they need a paper trail of where you obtained the funds. They need to make sure that you don’t have a loan out somewhere else in order to buy the home. The down payment and closing costs funds must be your own.
Permission to Pull Your Credit
You’ll need to provide signed authorization for the lender to pull your credit. This is one of the first things you’ll do when you apply for a loan with a lender. The lender will go over your credit report to look at your score as well as the history itself.
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Your credit score will give the lender an idea of which program you will need. For example, if you have a credit score in the low 600s, you may be a better candidate for the FHA loan rather than a conventional loan.
The lender will also look at your credit history. They need to know which debts you have outstanding now as well as the amount of the payments. The lender will compare these debts to your gross monthly income according to your income documents to calculate your debt ratio.
Proof of a Housing History
It really helps if you have a housing history when you apply for a loan. Of course, it’s ideal if you’ve had a mortgage before. If you did, the lender can just use your credit report to determine how well you paid your loan.
If you rented, you can still provide proof that you paid your rent on time. The easiest way is to provide copies of your canceled checks for the last 12 months. If the checks are dated the same date every month and for the same amount, the lender can use it as a positive rental history. If you don’t have the canceled checks, you can also ask your landlord to complete a Verification of Rent form for you.
If you rented from your parents, you can have them write a letter sitting the amount of the rent that you paid and the date that you paid it. You should also include your 12 months of canceled checks in order to back up the statement.
Letters of Explanation
If you have any odd situations that a lender might balk at, have a Letter of Explanation ready. The LOX should explain the situation in as much detail as possible. If there is any proof you can provide with the letter, it can increase the likelihood that the lender will accept the LOX.
In your LOX make sure you not only explain the situation, such as a bankruptcy or gap in employment, but also the solution. You need to show that you overcame the issue and have moved on in your life. You want the lender to think that you are a good risk.
These documents are a good start to help you get the loan you want. Of course, each lender has their own requirements and each situation has different needs. If you respond to your lender quickly with their request, you can get your loan closed in a timely fashion.