Planning on buying a home? While the shopping process is certainly exciting, the first thing on your to-do list should be applying for a loan. Not only will it give you greater confidence walking into a deal, but your approval amount will also have an impact on your shopping journey. So, let’s walk through the loan documents you should prepare now to make sure things go as smoothly as possible from here on out.
The first thing a lender will ask for when you begin to fill out an application is proof that you are who you say you are. This usually starts with your name, current address (and your previous address if you’ve moved within the last two years), birthday, and perhaps your social security number.
As they move forward with your application, they’ll generally want to scan a photo ID. You can use your driver’s license, passport, or another official document. Some lenders will require two IDs. Requirements vary regarding how you can provide this documentation, whether you need to officially scan them (front and back) or if you can provide a color photo of the ID.
Proof of Income
Tax returns are likely the first documents lenders will request because they give a quick and accurate snapshot of your annual income. Generally, they’ll request the previous one to two years’ returns. If you’re self-employed, you should also anticipate providing your business tax returns alongside your personal tax returns. The lender may also request a year-to-date profit and loss statement from self-employed individuals, and potentially a balance sheet for your business.
Lenders are looking for large fluctuations in your year-to-year income and they’re also going to make sure the numbers on your application and on your pay stubs match what you report to the IRS. In addition to your previous years’ tax returns, current pay stubs will help prove that you’re still employed and earning what you say you are. For self-employed individuals, you can prove your income by showing bank statements, direct deposits, 1099 forms, and other means.
Income classified as “other” includes child support, alimony payments, and other such money you may receive. You can decide whether or not you want this income to be considered as part of your application, but if you decide that you do want the lender to consider it as part of your income, you will need to provide proof of it as well.
This type of income can be counted towards your borrowing capacity so long as you have consistently received these payments for six months or more and you’re going to continue receiving them for at least another three years. This is because lenders know this income is only temporary, but they need proof that you can use it to help meet the long-term payment obligations you’re signing up for. Bank statements are one type of documentation that you can use to prove you receive these payments. Court records showing your entitlement to these payments may also be requested.
You will also need to prove VA benefits, retirement income, social security income, and/or long-term disability income if you are receiving any of these and would like them to be considered as part of your application. Special documentation may be required for each of these income sources, so ask your lender in advance in order to prepare.
To further assess your risk, a lender will almost always pull your credit report. Doing so will require your permission as, every time a lender pulls your credit report, it’s listed as an “inquiry” on your report and it will remain there for up to 2 years). A large number of inquiries can alert lenders to credit-seeking, which could be a red flag. So, don’t allow your credit report to be pulled unless you’re serious about pursuing a loan.
In addition to looking at your report, which will show the lender any open and closed accounts from the past 7 years, the lender will also consider your credit score. The most serious things they’ll consider are delinquent accounts, late payments, foreclosures, and so on. They may request a statement that explains any negative items they find. These things will also impact your score and, since most programs have a minimum credit score to qualify, you’ll want to check your score yourself before applying.
It’s not surprising to hear that a lender may request a written explanation regarding major negative items on your credit report, such as a previous foreclosure. However, lenders may also request explanation letters for a variety of other things that may apply to you. For instance, if you have experienced a gap in your employment over the past 5-10 years, or especially more recently, they may inquire about it.
Generally, lenders will only request such explanations for large gaps in the past 2-3 years. If you are currently unemployed, the explanation will be much more important (i.e., seasonal work). Additionally, since you can get a home loan on unemployment income, they may ask for unemployment income transcripts to verify the amount you’re receiving. If you’re a construction worker, farm worker, or another long-term seasonal worker and unemployment income is a regular occurrence in your life, they will want to see this verified in your income tax returns.
If you’re making a down payment, lenders will want documentation showing that the money has been in your account for some time and didn’t appear overnight. In most mortgage programs, using a credit card, loan, or gift to cover your mortgage payment is disallowed, so anticipate explaining to your lender where the money came from.
To assess your risk profile, a lender may also request statements relating to any assets you hold, such as your life insurance policy and any investments you have made. Lenders like to see that you have assets that could be sold to cover several months of mortgage payments in the event that you lose your job or another emergency occurs.
In the event that you have received some money as a gift towards your home purchase, you will need to document your relationship with the person who gifted the funds. You’ll also need to disclose the full amount of the gift(s). Your lender will request that either you or the gift giver provides a written statement explicitly stating that the money is a gift and not a loan.
While every loan program will require some paperwork and phone calls, LemonBrew Lending is here to simplify the search by helping you compare and apply to the best loan programs for your needs. You can learn more about our loan options (ranging from 9 to 28-year terms) and start the application process by going here.