Applying for a mortgage is a big step. In order to make the process go as smoothly as possible, you should be prepared with the documentation every lender will require, no matter what type of program you apply for to purchase or refinance your home. Every program has the same basic requirements that allow the lender to determine who you are, where you live, how you make an income, and how you handle your finances. Once these basic documents are reviewed and accepted, the remaining information that is particular to the program you applied for can be requested.
You have to identify who you are and prove that you are that person in order to apply for a mortgage. This is done simply with at least two forms of identification. The most common include:
- Primary identification – Driver’s license or other state issued picture ID
- Secondary identification – Another government issued ID, such as a passport, social security card, or green card
These documents help the lender satisfy the Patriot Act and help the lender determine that you are the person that you say that you are.
Your personal documents, which will provide the lender with your name, address, and social security number will enable the lender to pull your tri-merged credit report. This report is what shows the lender your outstanding debts and how you pay them. This is when the lender is able to determine your financial responsibility. If you have many late payments reporting on your credit report, chances are you will not be able to get approved for any program. The lender does not only look at the credit score, but the credit history plays an important role as well.
Your employment history is just as important as your credit history as it says a lot about you. If you changed jobs frequently throughout the last 2 years, which is usually how long lenders look back, you could be considered high risk. The lender wants to see a borrower at the same job for at least 2 years to consider them stable. This shows that you have commitment and that you will do whatever is necessary to stay at your job in order to keep a steady income. Of course, there are exceptions to the rule:
- If you changed jobs to take a higher paying position
- If you changed jobs to take a promotion
- If you took a break to take advantage of higher education to better yourself
These situations could grant you an exception if you do not have a stable 2 year work history.
You should have some type of housing history when you apply for a mortgage. That housing history does not have to include a mortgage; otherwise there would never be such a thing as a first-time homebuyer. Instead, you just need to show that you have been able to manage housing payments that include rent. This could even be rent paid to a relative as long as there is irrefutable evidence to show it. This includes canceled checks and bank statements to show that you made the payments at the same time every month for at least 12 months. This shows the lender that you can handle monthly obligations that pertain to your living arrangements. The lender will want to see a 2-year housing history as well, because if you bounced from place to place it could show some inconsistency in your ability to stay put, which could make you a higher risk.
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Perhaps one of the most important things you provide the lender is your income history. The lender will look back over the last 2 years in regards to your income. They will also pay close attention to your current income. This is done by requesting the following documents:
- Pay stubs for the last 2 pay periods, whether that means last 2 weeks, 4 weeks, or 2 months
- Last 2 years’ worth of W-2s
- Last 2 years’ worth of tax returns if you are self-employed or have a varying income
- Bank statements for the last 12 to 24 months to verify receipt of the income
- Letter from your CPA if you are self-employed stating your dates of self-employment
The lender will look at your income to determine its stability. If your income decreased over the last 2 years, you will need to provide an explanation as to why and what will happen in the future. The lender will need proper proof if you say that the income will go back up or provide reasons for the decrease; if you work hourly, seasonal, or on commission, this is rather easy to explain. The lender will then use a 2-year average of your income in order to allot for the ups and downs that your income experiences.
If your income was not stable over the last two years, you will have to provide ample explanations for these occurrences. If you changed jobs or stopped working for a while because you went back to school, had a baby, or any other life altering changes, you can explain the situation and prove them to the lender to get an exception.
These basic documents will get you started with any loan program. From there, every program has its own requirements, whether it is a government-backed loan or a private loan. The faster you work with the lender and provide the documents required, the easier time you will have getting approved fast.
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