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Buying

5 mortgage must-dos

mortgage docs.jpg

 (iStock)

For most people, the pre-approval process for a mortgage starts with a credit check and a review of your pay stubs. But before you can seal the deal, there’s quite a bit more paperwork to be done. To make sure your home buying experience goes off without a hitch, here are the records you need to get in order before a lender will sign off on your mortgage.

Income Verification

The first step in securing a mortgage is to prove that you have a regular and reliable source of income. While it differs from lender to lender, most will ask for the most recent month of pay stubs, back account information, as well as your most recent W-2 form. Sometimes proving income can be a little more difficult. If you’re self-employed, you’ll need to bring in your 1099 forms, and if you’re retired you’ll have to show proof of Social Security income and an accounting of your retirement assets.

Credit History

You can’t get a mortgage without a significant credit history. The first step, of course, is the credit check. These days, lenders are looking for a score of at least 650 in order to proceed with a loan. Lenders also want to get a total picture of all the debt you owe. Keep in mind that too little debt can be as bad as too much — lenders want to ensure that you’re good at handling debt that you have. So while you might prefer to pay in cash, lenders still want to see that you have a few credit cards and that you can use those cards responsibly. In addition to credit cards, a lender will look at the rest of your debt — such as car and student loans — and come up with your total debt-to-income ratio. This number is a crucial figure in determining whether you’ll get a loan and what sort of rate you can get. For most lenders, if you’re spending more than 43 percent of your monthly income to pay off debts, you’re going to have trouble getting a loan. 

Tax Transcripts

Buyers are often surprised to learn that most mortgage applications these days require you to provide two years of tax transcripts to the lender. If you’ve failed to file in the past, or are filing late this year, it can create some serious complications that will delay the mortgage. Keep in mind, most lenders want your tax transcripts, not your the 1040 form that you filed. A tax transcript is the record that gets created when the IRS processes your return. As is the case when dealing with large bureaucracies, it can take a while to get these records from the IRS, so make sure to ask for them early in the process.

Why are lenders looking so closely at your tax records? Essentially, they want to get a full understanding of you financial history, and ensure that the income on your W-2 documents matches up with what Uncle Sam has on file. The lender also wants to get a picture of a borrower’s adjusted income, rather than just the reported income. For instance, a borrower might make $80,000 a year, but the tax return shows that the borrower wrote off a $20,000 business loss last year, which means the borrower can only claim $60,000 in income for the purpose of the loan application.

Proving You’ve Paid Your Bills

For lender, it’s not just a matter of having the income to pay off your loan, they also want to make sure that you’re punctual about paying your bills. To get a sense of how responsible you are, they’re going to ask you to prove your past payment history. If you’re currently a renter, you might need to supply up to a year’s worth of rent receipts, as well as the contact information for the building owner. Lenders will also ask borrowers for utility bills, credit card statements, insurance payments and other recurring bill, as they look for signs of habitual lateness.

Documenting Gifts

For many new homeowners, the money for the downpayment comes from a family member. While the lender doesn’t mind if your family helps you financially, they do want to ensure that the money is a gift and not a loan. If it is a loan, it will have to be counted alongside your other debts, and will then be included in your debt-to-income ratio. But if your family is giving the money as a gift, they’ll need to include a letter stating that the money doesn’t need to be paid back.