Get Your Paperwork Ready to Buy a Home
You’ve crunched the numbers and have an idea of how much you’re comfortable spending on a monthly home payment. Your credit looks good, and you’ve done your homework on what lenders look at regarding your income and savings.
The only thing left to do is get all the paperwork ready for the loan process. You may not need all items mentioned in this article for your loan, but if you have them organized and ready to hand over, you’ll save time trying to throw it all together if any issues arise during the home loan process.
When an underwriter is reviewing your loan, first impressions are everything. If the lender has to guess about a late payment on your credit report, a sudden increase in your income or a large deposit in your checking account, you might have a rougher road to the closing table.
I’m getting a digital mortgage. Why do I need to organize my paperwork?
Technology promises to make your mortgage documentation experience much easier. However, it’s important that you understand how it works and that you might need to provide paper documentation anyway.
First of all, the privacy part. In order for a lender to access your information digitally, you give them permission to access your employment and income information eletronically. That’s really nothing new — most lenders already check your employment and income with services that have your income history archived, as well as the number of years you’ve worked at a particular employer.
What’s a bit newer is the ability for lenders to access your banking information. Rather than providing bank statements, you give your lender “view only” access to your online account. The lender can’t access any funds, or perform any transactions, but the loan processor or underwriter will be logging into your account to look at your deposit and debit history for the past 60 days.
The drawbacks to this automation: The income system is mostly tied to large employers like hospitals and universities, so if you work for a smaller company, you’ll probably end up needing to provide paperwork the old-fashioned way. If your online banking shows large deposits or your bank doesn’t allow your lender to access their information remotely (not all banks do), then you’ll end up sending your full bank statements anyway.
Here we list the most common documents you’ll need and a brief explanation of why you need them. One caveat — if you are saving these documents electronically, avoid taking pictures with a smartphone. Because the photo files can be altered with editing software, some lenders won’t accept them.
|Income Documents You Need for a Mortgage|
|Income documents needed||Why you need them|
|Pay stubs for a full month||To verify your year-to-date income|
|W-2s for the last 2 years||To verify consistency of your income|
|All pages of federal tax returns||To verify self-employment and any other income you might receive besides W-2|
|Addresses and phone numbers for employer(s) of previous 2 years||To verify your employment history|
|CPA and/or tax preparer phone number||For any questions a lender might have about tax returns or self-employment history|
|Start dates and end dates of employment last 2 years||To verify the dates with your employer|
|Trusts, wills and/or award letters||If you get trust income, the trust verifies the monthly payments. If you receive Social Security, pensions or retirement income, documents verify how much you receive monthly and how long you’ll get it.|
|Recent degree or trade school certifications||To document training and completion of education that led to a recent job or change in your field of work|
|Divorce decree and/or child support agreement||To verify if you receive alimony or child support and how long you’ll continue to receive it|
|Leases and/or rental agreements||To verify income if you have rental properties or are renting a house you currently live in to buy something new|
If you’ve never applied for a mortgage, it’s important to understand that the credit scores a lender looks at may be different than what you see on a free credit score tool. That’s because there are dozens of credit scoring models out there. Mortgage lenders specifically look at three credit scores — one based on the data from each of the major credit bureaus, TransUnion, Equifax and Experian. Of those three scores, the lender will use the middle one in evaluating your loan application. If you are borrowing with someone else, keep in mind lenders will look at the other person’s middle score as well as yours and likely use the lower of your scores for qualifying.
|Credit Documents You Need for a Mortgage|
|Credit documents you may need||Why you’ll need them|
|New credit card or installment statements||If you opened credit in last 90 days, the payment and balance might not show up on credit report|
|Explanations of late payments||Late payments: lenders want to know the reason for late payments, especially if recent|
|Tax liens/credit payment agreements||To prove verification of release of tax liens or payment arrangements for past-due taxes|
|Current rent and landlord information||To verify your payment history as a renter|
|Alternative credit||If you have no scores, lenders may accept proof of other monthly payment obligations, such as 12 months proof of your rent, utilities and an additional account like car insurance or cellphone bill. The combination of these becomes your “alternative credit history.”|
|Asset Documents You Need for a Mortgage|
|Asset documents you’ll need||Why you’ll need them|
|Most current 2 months bank statements, all pages||To show your savings history and confirm you have enough funds for down payment and closing costs|
|Most current 2 months, or if applicable, most current quarterly retirement or 401(k) statement||Required if you are using a retirement account or 401(k) loan for your down payment or closing costs|
|Terms of withdrawal documents for retirement and 401(k)||This document verifies you are allowed to withdraw or borrow funds from your retirement.|
|Gift letter and donor proof of funds||To verify the funds being gifted. You may not have the gift letter form until you actually select a lender, but make sure whoever is gifting you the funds knows they’ll have to provide some of their banking information.|
|Explanation for large deposits||If your bank statements have large deposits, the lender will want documentation or at least an explanation of the deposits|
|Proof of ownership of assets you are selling for down payment or loan costs||If you are selling an asset for your down payment or costs, be sure to have a copy of something showing your ownership and documentation of how much it’s worth|
Special loan program requirement documentation
One of the great benefits of being an active duty or military veteran is the ability to purchase a home with no down payment. The VA loan program may be an option for you if you can provide documentation of your loan eligibility.
VA loan documentation requirements
- DD Form 214: If you are retired from the military, you should have received a form DD Form 214, which provides details of your service. This form is used to verify your eligibility for VA home loan benefits.
- NGB Form 22: If you are retired from the Army or Air National Guard, you will need an NGB Form 22, which is a report of your separation and Record of Service, or a retirement points statement
- Retirement points summary: You will need to provide your retirement points summary to verify that you are eligible for VA financing if you are a member of the reserves or National Guard.
- Statement of service letter: If you are currently still on active duty, you’ll need a statement of service letter signed by the adjutant, personnel office or commander of your unit to verify your eligibility for VA mortgage financing.
- Proof of service-related disability: You should receive a VA disability award letter from the VA if you have any type of disability related to your military service.
- Certificate of eligibility: You may be able to obtain this electronically or you may need to fill out a request for certificate of eligibility form and email or fax it to your regional VA office to have it completed.
The three parts of a great letter of explanation
Computer algorithms do a lot of the heavy lifting when it comes to mortgage loan approvals these days, but the final decisions to approve or deny a loan may come down to the explanations you provide about income, assets or credit history that don’t fit into the standard underwriting approval guidebook.
Part 1: Provide details about what happened. Maybe you were laid off from work or were traveling when a credit card bill came due. Perhaps a difficult divorce led to a soon-to-be ex-spouse to not pay agreed-upon bills that were in both your names. The more detail you provide about the circumstances leading to lower income, late payments or large cash deposits, the better.
Part 2: Explain how things have changed. If your new job is with a new, more stable company, or your divorce is finalized and all your joint debt has been paid in full, then explain that. Paint a clear picture of how your current situation has improved.
Part 3: Show the lender you have the ability to repay the loan now. If you are budgeting for a new house payment that’s only $100/month higher than the rent you’ve paid perfectly the past three years, put it in writing. If there is some part-time income a spouse is earning, or you have a large 401(k) balance that isn’t quite vested yet, but you will be able to access, add that to your letter.
Putting it all together and telling your story
Many parts of the loan process are automated now, and a computer will determine your eligibility at first. The process is pretty simple if you have cookie-cutter income, all your money is already saved up in the bank and you have a pristine credit history and a high score.
There is good news if you don’t fit into that perfect lending box: A well-documented loan file will often allow you to get approved, even if you have less-than-perfect credit, some ups and downs with your income or a complicated down payment plan for your loan.
Ultimately, a human being called an underwriter is going to make the judgment call on your loan. The more organized your paperwork is and more detailed your explanation is for any rough patches, the more likely you are to get approved for a mortgage loan.
You’ll also make your loan processor very happy if you have little details like the start and end dates for your jobs, and the names and phone numbers for your past employers. A happy loan processor means a faster approval, and a faster approval means you’ll be holding the keys to your house sooner than later.