Before shopping for a home, you should get pre-approved. Knowing what you can afford makes you a knowledgeable buyer. Giving the seller proof of your eligibility for a loan makes you an attractive buyer. What does it take to get that pre-approval letter?
Lenders must verify all aspects of your financial life. Just what does this mean? Namely, it’s your income, assets, credit score, and current debts. Sure you could verbally provide this information, but there’s no proof. Lenders want proof if you want a written pre-approval. While your credit score gives them some information, it’s only a piece of the puzzle.
Proving Your Income
Your income is the second largest piece of the mortgage puzzle. A great credit score means you pay your bills on time and use your credit responsibly. But it’s your income that determines what bills you can pay. Lenders need concrete evidence of your income so they know you can pay your mortgage. The documents you need depend on your type of employment.
- W-2 earners need their last two paystubs and W-2s for the last two years.
- Self-employed or commissioned employees must provide two years of tax returns, plus a current YTD Profit & Loss statement.
- Real estate investors must provide a copy of the current lease, two years of tax returns, and a market analysis of the rental home’s value.
Proving Your Employment
Income is one thing, but lenders need to know the stability of your employment. Providing your employer’s name and contact information is usually enough. Lenders will contact your employer to confirm your employment. They also confirm your income, and potential for continued employment.
While no one can predict the future, lenders want to know that you are secure in your job. Temporary jobs or new jobs throw a wrench in the system. They don’t show continued potential. Lenders prefer a 2-year history at the same job or within the same industry. Contracted jobs must be contracted out for at least the next three years.
Proving Your Assets
You must prove you have the money for the promised down payment. Lenders need proof of your assets to confirm this.
If you have standard bank accounts, such as savings or checking, provide the last two months’ of statements. Make sure you include all pages, even the blank ones.
If you have brokerage accounts, provide the statements from the last two months. If you have quarterly accounts, provide the statements from the last two quarters. Again, provide all pages, including the blank pages.
List of Debts
Lenders pull your credit to see your debts, but you may have some that don’t report. You are under obligation to report all debts. This includes child support and alimony payments. List the debts on the mortgage application. Make sure to include account numbers, balances, and monthly payment amounts.
Lenders like to see that you have a history of making housing payments. Even if this is your first home, did you rent? Provide proof of those payments.
Provide lenders with canceled checks for the last 12 months. If you don’t have easy access to them, ask your landlord to write a letter showing your payments for the last 12 months. Lenders look for timely payments. They also look at the amount of payment shock or the amount your payment will increase with the new mortgage.
Bankruptcy or Foreclosure Documents
Did you have an unfortunate credit event before? If enough time passed (average of three years), it may not affect your chance for a mortgage, but lenders still need proof of its discharge.
Each lender has different requirements. Inquire about the necessary documents early in case you have to order any from the county or your attorney.
Will you receive all or some of your down payment as a gift? Get ahead of the game and get a gift letter. A letter from your donor stating the amount of the gift, the reason, and that it’s not a loan will move the process along. Lenders can accept the down payment funds and comfortably write your pre-approval letter including the down payment gift in the amount.
The more documents you have ready for your mortgage pre-approval, the faster you’ll get it. Lenders call it a conditional approval because it’s conditional on certain factors. The fewer conditions you must clear, the faster you can get to the closing table once you sign a contract.