If you are thinking about applying for a mortgage, there are certain documents you will need. Lenders need to know how well you can afford the mortgage. They figure this out by doing an in-depth analysis of your finances.
In order to apply for a mortgage, you’ll need to provide lenders with all of the following documents in order to start the process. Even once you provide these documents, you may need to provide more, but it’s a good start to get you on the path to mortgage approval.
Proof of Income
It’s not enough to tell a lender that you make a certain amount of money each year; you have to prove it. Lenders want to see your past couple of years’ worth of income. The type of income you make will determine what type of documentation you need:
- If you are paid on a yearly salary – W-2s
- If you are paid hourly – W-2s
- If you own your own business – Tax returns
- If you are paid on commission and it makes up more than 25% of your income – Tax returns
- If you are paid on bonuses and it makes up more than 25% of your income – Tax returns
Typically, you’ll need to provide the documents for the last 2 years. Lenders use the documents to compare your income. Did it increase or decrease over that time period? Did you write off a lot of business expenses? This will play a role in the income the lender can use to qualify you for the mortgage loan.
If you work for someone else, you’ll also have to provide the pay stubs from the last 30 days. If you get paid weekly, you’ll need to provide the last 4 weeks of pay stubs. If you are paid bi-weekly, you’ll provide two paystubs.
Proof of Assets
Typically, lenders need to see your last 2 months’ worth of bank statements for any assets you claim. This is especially important for purchase loans because lenders need to determine where you are getting the money for the down payment and closing costs. You can’t just say you have the money; you have to prove that you have it.
Lenders ask for the last 2 months of bank statements to make sure that the money you are using didn’t just appear. For example, did a friend or relative give you money? Did you take out a loan to get the down payment money? These are things the lender needs to know. If the money did just appear, be ready to explain it.
Many loan programs do allow gifted funds, but you have to be able to prove that the money is a gift. In other words, you need to prove to the lender that you don’t need to pay the money back. If you do, the lender will need to include the payment in your debt ratio calculation.
If you do receive gift funds from a relative, employer, or charitable organization, you must provide a gift letter. This letter is from the donor stating the following:
- The money is a gift
- The property it is meant for
- The person it is meant for
- There is no repayment required
Along with the gift letter, the donor will need to provide proof of ownership of the funds. This usually means the last two months’ of bank statements. The lender needs to make sure that the donor actually owns the funds. If the donor sold an asset recently to provide the funds, he/she should provide the bill of sale or other proof of sale to show that the funds aren’t a loan of any sort.
Finally, you’ll need to prove some type of housing history. If you lived with your parents, you can provide a letter from your parents stating that you lived there either rent-free or state the amount of rent you paid.
If you rented from a landlord, you may be asked to provide 12 months of canceled checks for the rent. If you don’t have the canceled checks, you can also have your landlord complete a Verification of Rent form.
The lender needs to know that you paid your rent on time every month. They also need to know the amount of rent you paid so that they can figure out the payment shock you will experience with the new mortgage. This could play a role in your risk level. If the payment is much higher than what you are used to paying, it could make you a high risk for default.
The essential documents you need for a mortgage are something you can start gathering as soon as you think you want to apply for a mortgage. It can take some time to get all of the documents and the more documents you have to give a lender right away, the easier it is to get your answer. Lenders can give you a pre-qualification, which basically is an estimate of what you can afford, but without the rightdocuments that’s the best they can do. If you want a real answer, get your documents ready and provide them to the lender right away.