Ask anyone who’s applied for a mortgage or a refinance and they’ll tell you one of the biggest hurdles is gathering all the paperwork. Lenders want detailed information on your financial past and present to help them to predict your financial future.
Before making what’s likely to be the biggest purchase of your life, here’s what you should collect now before you apply for a mortgage.
Proof of income
A lender wants to know that you’ll be able to repay the loan. At minimum you’ll need to show proof of steady income and provide last year’s W-2 form, your most recent pay stub, and your tax returns from the past year, says Jim Burrington, a loan officer for Grande Financial in Maumee, Ohio.
Depending on your income history and the size of the loan, you may also have to show additional paperwork.
“Occasionally one item triggers the need for additional items,” says Burrington.
For example, getting a mortgage when you’re self-employed often requires even more documentation, like profit and loss statements from your business or 1099 forms if you work on a contract basis.
Earnings outside of a 9-to-5
If you make money from other sources, you’ll need to provide detailed information about that, too. For example, someone who receives child support or alimony will likely have to provide a copy of the divorce decree. If you earn rental income from investment properties, you may be asked to provide a copy of the lease agreement.
Compensation outside of a paycheck may also be considered. According to a 2017 report from the National Association of Realtors [PDF], millennials have made up the largest percentage of homebuyers for the past four years.
“As we’ve been looking at this new wave of homebuyers, we see that their income profile is a little different than what we’ve seen in the past,” says Viral Shah, head of capital markets for Better Mortgage.
According to Shah, the newest generation of homebuyers may have stock options making up a significant part of their employment package, and this should also be taken into account when assessing a potential borrower’s complete financial picture. If this applies to you, it may make sense to have a copy of your employment contract showing how many shares you own and what the vesting schedule is.
You’ll have to put together a complete list of all debts you have, including credit cards, student loans, car loans, alimony and child support payments, along with a breakdown of balances and the minimum monthly payments on each.
No matter how much you’re earning, it can seriously impact your debt-to-income ratio, which is a crucial component to determining your overall credit score. If you’re spending beyond your means, or you have a lot of high-interest debt, you’re less likely to qualify for the lowest rates on a mortgage. Use a debt-to-income ratio calculator to estimate how you might be viewed by lenders. If you have a lot of outstanding debts, it might make sense to pay those down first before applying for a mortgage.
An inventory of assets including bank statements, investment records, retirement accounts, real estate, and auto titles, and any other investments also make up a large part of your financial picture.
The bank wants to be sure you have enough savings to weather any unexpected expenses after you close on the house. They may also want proof that you paid the down payment from your own account and not as a loan from someone else. If you received money towards the down payment as a gift, you may be required to provide documentation that declares it was a gift and not a loan.
Depending on the lender, you may have to sign an IRS Form 4506-T, which allows the lender to get a transcript of the tax return from the IRS. In some cases, the lender wants to see that what you declared to them matches exactly what you declared to the IRS. The IRS Form 4506-T serves to verify that all of the data on your W-2, 1099 or 1040 matches what you said on your loan application.
If you had a bankruptcy within the last several years, you may be asked for your bankruptcy discharge papers. In some cases, a bankruptcy can appear on your credit report for up to ten years. Even if you’ve been on sound financial footing since then, a lender will want to see that you’ve settled with your creditors.