One of the biggest hassles of applying for a mortgage or a refinance is gathering all the paperwork. Lenders want detailed information on your finances so they can size you up and determine whether you qualify for a home loan.
Before making what’s likely to be the biggest purchase of your life, here’s what you should collect 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 provide:
- The previous year’s W-2 form.
- Your most recent pay stub.
- Your tax returns from the past year.
Depending on your income history and the size of the loan, you may have to show additional paperwork. “Occasionally, one item triggers the need for additional items,” says Jim Burrington, a loan officer for Grande Financial in Maumee, Ohio.
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 regular job
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 show the lender a copy of the divorce decree. Someone who earns income from rental properties may be asked for a copy of the lease agreement.
Compensation outside of a paycheck may also be considered. A 2017 report from the National Association of Realtors (PDF) shows that 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.
The newest generation of homebuyers may have stock options as a significant part of their employment package, Shah says, and this should be taken into account when assessing a potential borrower’s complete financial picture. If this applies to you, it makes sense to have a copy of your employment contract showing how many shares you own and the vesting schedule.
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.
No matter how much you’re earning, your debts can seriously impact your debt-to-income ratio, which is a crucial component of your 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 them down 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.
You may have to sign an IRS Form 4506-T, which allows the lender to get a transcript of your tax return from the IRS. In some cases, the lender wants to see that what you declared to them matches what you declared to the IRS. The IRS Form 4506-T verifies that all the information on your W-2, 1099 or 1040 matches what you said on your loan application.
If you had a bankruptcy within the past 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 10 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.