Are you thinking of purchasing a home this year? Whether it’s your first or tenth time, there’s so much more to applying for a home loan now than there was back in 2007. In the years leading up to the Great Recession of 2008, it was relatively easy to get a mortgage. Lenders offered loans to borrows, seemingly without thoroughly vetting them!
Unfortunately, because of this, many borrowers couldn’t afford their mortgages and ended up defaulting, which is often cited as the catalyst for the Great Recession. As a result, Congress began requiring creditors to better assess their borrower’s ability to repay the loans. There are three things that creditors must do:
- Account for the home buyers’ assets
- Calculate debt-to-income ratio
- Evaluate credit history
The exact forms you need to provide to the lender during the home loan process may vary but you’ll typically need these six documents so that your mortgage lender can assess how much you can appropriately borrow.
Mortgage lenders are going to want the full history of your financial situation. Lenders generally want to see two years worth of tax returns. This is to make sure that your annual income is consistent with your reported earnings through pay stubs and that you’re not experiencing huge income fluctuations from year to year.
Pay Stubs, W-2s or Other Proof of Income
Lenders may also ask to see pay stubs along with your tax returns. You typically only need to bring the last two months’ pay stubs. Your tax returns will give your lender the clearest idea of your overall financial health, but pay stubs will help them understand your current earnings. If you’re self-employed or have other sources of income, you may need to show your lender proof through 1099 forms, direct deposits, and other income statements.
When assessing your risk profile, lenders will want to look at your bank statements and other assets. This can include investments such as your insurance, retirement accounts, and other sources. They will typically request these documents to make sure you have several months’ worth of reserve mortgage payments in your account in case of an emergency.
Arguably one of the most important items in the home loan process is your credit score. Be prepared to explain any blemishes on your credit report like missed payments, delinquent balances, or other negative items on your report.
You’ll likely need to be ready to provide your driver’s license or passport to prove you are who you’re claim to be! This is likely the easiest piece of information to produce for this entire process.
For those that have not purchased a home before, the lender will likely request proof that you have made your lease payments on time. They may ask for a years’ worth of canceled rent checks (checks that your landlord has cashed) or, they might ask your landlord to provide documentation showing you paid your rent on time. Your rental history will be especially important if you don’t have extensive credit history.
Throughout the home loan process, it is your lender’s goal to assess you as a borrower and ensure that you can make your payments on time. As such, you’ll need to provide them with the documents addressed above to paint an accurate picture of your creditworthiness.