The first step in the home buying process is to be pre-approved for a mortgage. It is important to understand what documentation the lender will require for a mortgage pre-approval and why it is necessary. Having a clear understanding of why the documentation is needed will eliminate frustration and delays during the mortgage process. The documentation that you will need to gather for your initial meeting with your lender includes the following:
• Most recent 30 days pay stubs
• Most recent two months bank statements (all pages/all accounts)
• Last two years federal tax returns (all schedules)
• Last two years residence histories (including the names and phone numbers of any landlords)
• Last two years employment history (including the employer’s name, address, and phone numbers) if you have had multiple employers or periods of unemployment a resume would be helpful to your letter
• Bankruptcy schedules and discharge papers (if occurred in the past seven years)
• Separation agreement, divorce decree, and court-ordered child support paperwork (if applicable)
• DD 214 and certificate of eligibility (if applying for a VA loan)
• Copy of current lease agreements (if rental property is owned)
• Last two years business returns and proof of existence of business (if self-employed)
Depending on the type of loan that you are applying for, your lender may have other documentation requirements.
To provide further clarification of the documentation needed for a mortgage pre-approval, there are four main areas of your past history that a lender will review. The following explanation of these four areas should provide a better explanation of why your lender requires this documentation.
(1) Credit History – It is advisable to request a full credit report prior to applying for mortgage. Loan programs, interest rates, and down payment are all determined by credit score. After you have a copy of your credit report, the areas to review include: your credit scores, any inaccuracies found in your credit report, any open collections or judgments, and any past-due accounts. Prior to applying for mortgage you should address any inaccuracies or derogatory accounts directly through the credit bureau. Once you are satisfied that your credit report is correct, you should receive an updated report from the credit bureau with your new credit scores. Your lender will pull a tri-merged credit report and then use the middle credit score for loan qualification purposes.
(2) Residence History – Your lender will require documentation supporting your last 2 years residence history. If you rent from a company, your lender will require the company’s name, address, and phone number. If your landlord is a private individual, you will most likely need to provide the last 12 months canceled rent checks.
(3) Employment History/Income – The lender will require documentation on the past two years of your employment. This will include your employer’s name, address, phone numbers, and the dates that you are employed. If you have a current resume, it would be useful to your lender to explain your employment history in greater detail, especially if you have had multiple jobs in the past 2 years. Depending on the type of income that you receive, such as: salary, tips, bonus, commission, or 1099 income; you’ll want to review the income that your lender is able to use to qualify you. Your lender may not be able to use non-salary income if it has been received for less than two years. Also, overtime and bonuses will likely not be used unless guaranteed by your employer. The lender will also deduct any recurring business expenses that you list on your tax returns related to your employment. Your tax return may also include rental income or loss, annuity income, or other income sources that may or may not be considered on your mortgage application.
(4) Assets – Your lender will require a copy of all pages of your last two months bank statements. This includes all bank and retirement accounts. Any large deposits made within the prior 60 days of your loan application will have to be fully documented showing the source of the deposit. Providing a copy of your retirement or 401(k) account is vital to a loan approval, because the amount of reserves you have after closing will influence your lender’s decision.
Each loan type has different guidelines, which view student loans, credit issues, bankruptcies, foreclosures, short sales, down payment, and other occurrences in your past differently. You should discuss how these may affect your loan decision directly with your loan officer. Understanding what is needed by your lender and providing them the proper documentation will eliminate frustration and potential embarrassment during your home buying process.