You don’t unwrap a whole bag of Starburst and shove it all in your mouth at once, right? I mean, you could unwrap two pieces and smush them together to make your own flavor, but a whole bag is a bad idea. That doesn’t sound like the best Tuesday night to me. Instead, you tear off the paper from each square (sometimes you eat the paper because you can’t get it all off, but that’s life) and eat them individually like a civilized human being. Home loans are like that. I wouldn’t say the home loan equals Starburst metaphor isn’t a one-to-one equivalency, but it works. Sort of. I’m not going to pull the wool over your eyes and claim that home loans don’t have a lot of moving parts. Like a bag of Starburst, it’s a lot less daunting to take them one at a time. I’m going to break down one of the most essential parts of home loans: the paperwork.
I’m taking some of the guesswork out for you, either so you can start gathering the documents you need, or you can start thinking about gathering what you need. This isn’t an exhaustive list of everything we’ll need from you, but it is a list of the most common documents we ask for in the preapproval stage.
Income and Employment
This part is pretty simple: we need to verify that you have income, where it comes from and how consistent it is. We want to make sure you can afford to make your mortgage payments now and into the future. In some cases, we can verify your income electronically, which requires less documentation from you.
I’m sure those of you who are self-employed are already aware of the challenge you face in this department. We actually have a loan program here at Flat Branch that helps self-employed people document their income more easily. You can find out more about our bank statement loan program here.
Here’s a specific breakdown of the documents we’ll need:
- Past 1-2 years of federal and state tax returns
- If you’re a W-2 worker, past two years of W-2 forms and paystubs from the last 30 days
- If you’re self-employed, past two years of tax returns and year-to-date profit and loss statements
Credit
Ah, the ever-looming credit score. Outside of income, I’m sure you know credit is an essential component to your loan approval. We’ll ask to pull your credit report for your score and credit history, which is affected by things like mortgage payments, bills and credit card payments, and the total amount of debt you’re paying off. The average credit score in the United States is 695.
Debts
While your credit score is important, what’s known as your debt-to-income (DTI) ratio is also a major determinant when we’re approving you for a loan. Your DTI ratio is the total of all your monthly debt payments divided by your gross monthly income (your income before taxes). To keep it short and sweet, we need to know how much of your income can actually be used for your mortgage payment, minus the other debt you pay on every month, and still have an inch or two of breathing room. Debt encompasses things like student or car loans, alimony, credit card debt and mortgage payments. Typically, 50% DTI is the maximum lenders will accept. The lower the DTI, the better.
Assets
While it might seem to come out of nowhere, we need to document your assets so we know that you can afford your down payment and closing costs. Additionally, we feel better about seeing that you have the ability to take on any financial setbacks you might face over the next several years. It’s always good to think ahead, right? We’ll need:
- Bank account statements from the past 60 days for all checking and savings accounts
- Additional asset statements from the past 60 days for any CDs (not the music kind), IRAs, stocks, bonds or other securities you plan on using for the down payment
- Bank statements and additional asset statements may be gathered through an automated verification service to make things easier on you
- If you’re using gift funds, proof that the funds are in your account and a signed letter from the gift giver saying that repayment isn’t expected
- If you have any current real estate holdings, the address, current market value, mortgage lender’s name and address, loan account number, and balance and monthly payment
I hope this has given you a little clarity about how you can start to face the loan process head-on. Of course, since we’re all individuals, what we need from you is specific to you and your financial situation. Reach out to one of your friendly neighborhood Flat Branch mortgage bankers to get started.
