Lenders require a lot of financial and employment data when processing your mortgage application. This can be intimidating for some, but being prepared ahead of time may make the process go more smoothly and quickly.
Your lender will review your debt-to-income ratio and assets to determine how much mortgage you can afford. They’ll also look at bank statements to confirm that you can cover down payment and closing costs as well as maintain cash reserves for unexpected expenses.
Financial Documents
When applying for a mortgage, the lender will require several financial documents to confirm your ability to repay the loan. A mortgage is an agreement which gives your lender the legal right to seize your home if you fail to make timely payments on what was loaned to you.
To verify your income, lenders require the most recent pay stub and tax documentation. This includes tax returns for the past two years for salaried employees and 1099 forms for self-employed borrowers.
Lenders need to verify your finances in order to cover the down payment, closing costs and other associated expenses when buying a house. They will examine your bank statements which will show how much cash you have in savings or other liquid assets.
These statements can be obtained from either your lender or online through your banking provider. They typically last two months and give the lender a good indication of how much money is in your accounts, any large non-payroll transactions that could impact your debt-to-income ratio, and whether or not you have cash reserves for closing costs and other mortgage-related costs.
In addition to these statements, you may need to present up-to-date credit card and bank statements. These will enable the lender to determine if you’ve used either card for any other purposes in the past such as opening or closing another account or making an investment.
These statements will also show your debt payments, such as car loans, student loans and other mortgages. This data helps the lender calculate your debt-to-income ratio which plays a significant role in determining whether or not you qualify for a mortgage.
Lenders will require to verify your credit history and any financial issues in the past. They’ll want to see a copy of your report, and you may need to submit a letter explaining any issues with your score or how they’ve affected you financially.
Tax Records
One of the most essential documents when applying for a mortgage is your tax records. Lenders require copies of your last two years’ returns in order to confirm that your income matches what the lender expects.
Underwriters at a lender will review your tax records and salary information from paystubs and W2s to determine whether you can afford to make mortgage payments each month. This documentation provides critical insight into your monthly income, which helps them decide if you can afford to cover them.
Your tax records also display your debt-to-income ratio, which is used to determine how much you can afford to pay on a mortgage each month. The more debt you owe, the higher your DTI will be and this may reduce the loan amount approved for.
Most lenders require you to fill out IRS Form 4506-T in order for them to request a tax transcript from the Internal Revenue Service (IRS). This transcript consists of all line items from your return as originally filed and serves as proof that the income reported on your mortgage application matches what was reported on your tax return.
If you are self-employed, your lender may request a profit and loss statement from your business. These records detail how much money was made and expenses incurred during the year in running the enterprise.
Once the loan underwriter requests them, you should provide your tax returns promptly to expedite the process and increase your chances of getting approved for a mortgage. It is especially crucial to meet these requirements if applying for a stated-income loan which requires proof that your income exceeds certain thresholds.
You can typically obtain IRS tax transcripts online or over the phone; however, visiting your local IRS office may be more efficient. Typically, it takes 5 to 10 days for them to be ready for pick-up.
Letter of Explanation
Underwriters reviewing your mortgage application seek a clear view of your financial situation, which is why they often request letters of explanation (LOEs). If there’s an issue with either your credit report or employment history, an LOE can give them more insight into what’s ailing you and whether or not you qualify for the loan.
If you have a credit history that might cause concern with lenders, such as an unsatisfied lender or unexplained income, discussing your situation with your mortgage officer ahead of time can save you from having to submit a letter of explanation. Doing this allows them to answer any queries they might have and makes the application process smoother overall.
When writing a letter of explanation, ensure it’s professional and to the point. Use an approachable tone without sounding condescending or emotionally charged. Also make sure to include dates, dollar amounts and account numbers so the underwriter can easily comprehend what you’re discussing.
You may wish to include a business card with your letter of explanation for easier retrieval, especially if it’s being sent via postal service. Underwriters likely handle many loan applications, so make their task simpler by keeping all pertinent information organized.
A well-written letter of explanation can bring you one step closer to getting the home loan that you need. However, it’s essential to remember that a last-minute denial is possible if your final credit check reveals a drop in your score or if there have been issues such as asset verification or fraud.
Lenders often request additional documentation after your application is approved if they need to verify something. For instance, if you have a joint account with another person, they might want to view recent bank statements from both accounts. Or if you’re renting an apartment, they might request your lease agreement.
Writing a well-crafted letter of explanation doesn’t need to be difficult, but it does require some effort. Make sure you proofread and edit your letter so that everything is factual, grammatically correct and professional. Having someone else read it also helps ensure there are no typos or misplaced punctuation marks.
Proof of Identity
To verify the identity of all parties involved in a mortgage application, lenders need to confirm their identities. Depending on the lender, this may be done through various methods; usually this involves asking for identification from both the applicant and guarantor.
Most commonly, this requires providing proof of identity in the form of a driver’s license or passport. However, some lenders will accept various documents to prove identity, such as birth certificates and voter registration cards.
Noncitizens must obtain this document to prove their citizenship status. Therefore, it’s wise to obtain all necessary documents ahead of applying for a mortgage.
In addition to the documents submitted with your application, it’s wise to store copies of other important identity-related documents in a secure place. Doing this makes the process go much smoother if you have them ready when giving them over to your lender.
Include a bank statement in your list of documents for your lender to get an accurate assessment of your income and current financial condition. Moreover, this helps them detect any red flags that could potentially hinder mortgage approval.
The statement should also include any modifications to your name and address, such as if you changed it prior to marriage or divorce. This information should be included.
Other essential documents you will need to provide include your employment letter, tax return and financial statements. All these will give your lender a clear view of your income level and stability as a borrower, plus show them where you keep your money.
Finally, any outstanding debts must be disclosed with your mortgage application. Lenders want to know whether you have a history of paying creditors on time and in full; this information could then be used by them to improve your credit score.
Prior to applying for a mortgage, make sure all your documents are in order. Not only will this save time during the application process, but it also increases your chances of approval and successfully closing on your new home purchase.
