If you are on the path to home ownership, more than likely you will be seeking a loan for such a large investment. And when you talk to a mortgage lender, they will require you to provide certain documents.
While it is impossible to determine exactly ALL the documents the lender will ask you to provide, there are a few that nearly all lenders will request from mortgage applicants.
Gathering these documents ahead of time will help quicken the process of getting loan approval. Mortgage lenders use these documents to determine not only if a client is loan-worthy, but exactly how much of a loan a client can comfortably afford and how much the lender will loan them.
It is ALWAYS a good idea to get a pre-approval loan before house shopping. You know how much house you can afford. You don't waste your time looking at houses you cannot afford, nor will you be disappointed when you can not afford your dream home.
But what, exactly, are the documents lenders will generally ask for?
Document #1 - Current W-2
Mortgage lenders request W-2s in order to verify your income and its sources. They can also determine, based on the W-2, how much mortgage you are eligible for.
In some cases, loan officers may even ask you for more than one year's worth of W-2s. And, if you and a spouse or partner are acquiring the loan together, you will both need to provide W-2(s).
Document #2 - Paystubs
Whereas W-2s provide an idea of how much money you made in previous years, paystubs prove that you have the recurring income to pay off a loan.
Generally, loan officers will ask for the past two paystubs, but sometimes, they will ask for you to provide even more. Again, if you and/or a spouse or partner are planning on acquiring the loan together, you will both have to provide paystubs.
"Home is where one starts from." – T. S. Eliot
Document #3 - List of debts
Most loan officers will ask you to provide a list of debts. Debts, as concerns loan officers and mortgage companies, are those monies that you owe on both secured and unsecured debt. This includes but is not limited to cars, other real estate property, credit cards, school loans, and in many instances medical debt.
While you may be tempted to leave some of the debts off such a list, it's advisable you are upfront with what you owe. In most instances, those debts will be found out, and then you run the risk of not getting a loan at all.
The mortgage lender considers these debts when calculating how big of a mortgage loan you can afford, as well as the monthly payments you can comfortably afford. Typically, they use a formula known as the debt-income-ratio or DTI. Your DTI is all your monthly debt payments (including a new mortgage loan) divided by your gross monthly income. Generally, lenders will require you to keep your DTI to roughly 43% or less.
Also, keep in mind, just because the mortgage company says you can afford a certain loan, doesn't mean you should afford that loan. It is a good idea to thoroughly understand your own budget, needs, and future wants to determine how much of a loan you, yourself, are comfortable with.
Document #4 - Tax return
Mortgage lenders generally ask for tax returns for the past two years as a way to verify you have the income, investments, and other monetary holdings that you say you do.
Document #5 - Bank statements
Asking for bank statements may seem intrusive to most people, but mortgage lenders do so in order to verify the income and expense history attested to on a mortgage application. The account balance information will also be examined to be certain there is sufficient liquid assets for the down payment and closing costs.
Let's go house shopping!
Like I said above, the mortgage lender may well ask for other documents as well, but once they have their documents, and you have been approved for a loan, it's time to go house shopping!
Best of all - you will no longer be paying your landlord's mortgage, you will be paying your own mortgage AND building your future wealth through home ownership!
And who doesn't want more money tomorrow than they have today?
Donna Hechler Porter is a real estate agent with Keller Williams Elite Realty in Baytown, Texas. An educator, a published author, and an arm-chair historian, Donna runs a small publishing business in addition to educating people about how to build future wealth through home ownership. Feel free to contact Donna at dhporter@kw.com.