The top responsibility for a potential home buyer is to provide documents to their lender when seeking a pre-approval for a mortgage. The lender will review your information to determine what kind of loan is best for your needs and also how much you can possibly afford. Listed below is an explanation of the type of documents needed and what they mean to the lender.
The lender will need to see if you have enough income to safely cover your current debts as well handle making the proposed monthly mortgage payment without putting a strain on your finances.
A mortgage lender will likely ask you for a list of documents. Each document serves its own purpose in the qualification process.
Here are the most common documents required for proving your income.
- Copies of your W-2 forms from the most recent 2 years
- Copies of both your state and federal income tax returns for the most recent 2 years
- Copies of pay stubs covering the most recent 60 days
The pay stubs show that you are currently employed along with your current rate of pay, whether it is hourly, salary, commission or some other sort of payment plan. The pay stubs will also show how much you have earned with that company year to date.
The W-2 forms will show your total earnings for each year over the last 2 years as well as the employer that paid you. If you have changed jobs during that time period, you will need to provide the W-2 forms from each job.
The tax returns show that you have filed returns properly and that there is little chance of a tax lien stopping you from purchasing a home.
Note for Self-Employed People: If you receive the bulk of your income from a company that you own, you will not need to provide pay stubs or W-2 forms. Instead, you will be asked to provide copies of tax returns for your business as well as your personal returns. You will also need to provide a cash flow statement for your business over the last 2 months. Also, if docmenting income through tax returns proves to be dificult, it may be time to think about trying a bank statement program.
Proving Assets for Purchase
Having the necessary funds for a down payment is very important for most loans. Even if you are fortunate enough to qualify for a mortgage without a down payment requirement, you will still be likely to pay some or all of the closing costs. Having the funds for any down payment, plus closing costs, plus a little extra, makes you a better risk for the lender and improves your chances of getting approved for the loan.
The extra money that is not necessary for the down payment or closing costs is called reserves in the mortgage world. Reserves are important because they cushion borrowers in the event of a medical hardship, unexpected change in jobs, automobile accident or any other type of event that will cost significant money. Having more reserves is always a good thing when applying for a mortgage.
Type of Accounts that Can be Used
The most common kind of accounts used for proving assets is savings, checking and money market accounts. All 3 of these accounts are easy to access and the financial institutions can provide statements for the last few months or even the last few years. Lenders can review the statements and get an average balance over time to see if the person has saved the money for the home purchase or simply received a windfall.
Any windfall will have to be fully explained and verified. If it is not possible to explain a large deposit, it can hurt your chances of getting approved.
Other Types of Accounts
Many people diversify their money by investing in financial instruments. Common examples of this are bonds, stocks and mutual funds. These funds can be used for a down payment and closing costs as well.
Lenders will ask for a statement that shows the value of the financial instruments over the last 60 days. The lender may also request documents that explain how you may sell the instruments in order to get the cash value.
If you are participating in a 401(k) plan with your employer, or if your employer provides another kind of retirement account, you may be allowed to use those accounts to qualify for the loan.
However, it is important to note that many of these plans have restrictions about accessing the funds. Your lender will request written confirmation from the employer that explains the rules of how you can get the funds and if it must be repaid. You will also need to provide a statement from the last two months.
If you are receiving any portion of the down payment or closing costs as a gift from a relative, the lender will require specific documentation.
First, there will need to be a solid explanation of how the person is related to you. Second, the transfer of money will need to be fully documented. This means that there will need to be proof of where the money came from, such as a checking account or savings account, and then there will need to be proof of where the money was deposited. Missing one of these steps or failing to document it correctly can cause problems with the loan approval.
In the majority of cases, the donor will need to complete a specific gift letter. Your lender can provide with the details that need to be part of the letter. Most importantly, the letter needs to state that this is a gift and the borrower is not expected to repay the amount.
Selling Personal Items
It is possible to sell personal items in order to come up with the money for a down payment, however, this is not the best option.
First of all, there will need to be a paper trail showing that you were the owner of the items and that you indeed sold them to a 3rd party. Secondly, there will need to be an independent way of verifying the value of the item. Lenders are trying to determine if you truly sold an item or if a person is simply giving you the money and trying to hide the transaction.
Selling an item like a car, boat or motorcycle makes things a bit easier. These kinds of items have a title and bill of sale associated with them. They also can usually be valued by online services that show a reasonable amount for the items.
Summing Up How to Document Your Assets for Your Mortgage Lender
The most important thing to remember is that all money, whether it is your salary or down payment funds, has to be properly documented. As long as you can show where the money is coming from and answer the lender’s questions, you should have a strong chance of getting approved for the loan.