As you get deep into your search for a home loan, it is important to be prepared. This means educating yourself on the general mortgage approval process and knowing what goes into the documents you need when applying for a home loan.
And lucky you… To qualify for a home loan in 2017 you have to complete quite a bit more paperwork than before the mortgage crisis that hit between 2007 and 2010. Before the Great Recession, lending was widespread and relatively speaking it was much easier to qualify for a mortgage. In other words, people were easily qualifying for mortgages that they truly could not afford. The loose vetting process made it such that banks were lending at astonishing rates.
Very sadly, once the subprime lending hit a peak, people who couldn’t afford their mortgages ended up defaulting on their loans and leaving the banks high and dry. It is this inability to pay the banks that was cited as the primary catalyst for the Great Recession.
Home Loan Requirements Are Different in 2017
So there’s a short bit of history for you. Following that very tough period in history, today’s mortgage requirements all stem from moves made by Congress. Essentially what the government did was 1) punish the banking system for being so careless with subprime lending, and 2) set rules to prevent a catastrophe like this from happening again. Congress set requirements that now require lender to take extra steps to analyze risk and assess a borrower’s ability to pay home loan obligations. In doing so, lenders will take special precautions to fully understand a homebuyer’s asset portfolio, existing financial obligations such as debt-to-income ratios and credit scores, as well as other factors that pertain to risk (property condition, employment history, etc.).
Home Loan Applications Require 7 Important Documents
While everyone is unique and many home buying situations may present different things to consider, we are going to generalize the seven basic forms that pretty much anyone should expect to provide a lender.
Depending on your unique situation, here are seven documents you might need when applying for a home loan.
1. Two Years of IRS Tax Returns
There isn’t much else that provides a quick and clear breakdown of your current financial standing than your most recent tax filings. A mortgage loan officer will have to provide a FHA lender with specific, personal information and this is only step one. To authorize a third party to request your tax returns, expect to sign a document called Form 4506-T. This is basically just a permission slip that allows the lender to obtain your tax documents.
To fully understand who you are as a buyer, it is very common for two years worth of tax returns to be analyzed. We understand that this may feel a bit imposing, but it is not personal. This is just the bank’s way of ensuring that your earnings are consistent and support what is shown on your proof of income (pay stubs).
2. Pay Stubs: Your W-2s or Other Proof of Income
This one seems a lot less imposing than the request for your IRS tax returns. Lenders may ask to see your pay stubs from the past month or so. Tax returns give a more broad, historical sort of view into your personal finances and pay stubs are little more granular in that they look at what is going on most recently. Self-employed individuals may have some extra hoops to jump through when it comes to proving your earnings and it is common for these folks to provide proof via 1099 Forms, bank statements, child support or alimony deposit slips, etc.Your tax returns help give them a clear idea of your overall financial health, while pay stubs help them gauge your current earnings.
3. Recent Bank Statements
There are many things that factor into your risk profile and we know that your earnings history is a big part of it. In addition to showing historical income and current earnings, home lenders will very often ask to see your bank statements. It may feel a bit overkill to you in that moment but if you were the one loaning a couple hundred thousands of dollars to a stranger, you would do whatever possible to make sure you’ll get that money back. A view of bank statements helps a lender determine what sort of reserve funds you have available and if your savings account and bank balances are healthy, this may indicate that you have several months worth of mortgage payments saved up should any emergencies or financial hardships unpleasantly surprise you.
4. Credit history
Do you know what credit scores are required to buy a home? Not only that, do you know what your credit scores are today? If not, you should definitely be aware of what they are and ensure that your credit reports contain only accurate information. Your credit score is one of the most influential variables in determining your eligibility for a home loan and there are many cases where unrelated people with common names will see negative credit items that are simply not theirs!
Maybe some of those credit items, the negative ones, are actually yours! This is not the end of the world by any means. If you are able to accept some of the common FHA lender overlays and in some case, provide a written statement that explains negative credit report items, a lender may factor that into your approval decision.
5. Gift letters
Sharing is caring and gifting is not uncommon. Many times a financially well to do relative may gift a newlywed couple with cash for a downpayment. In other cases, friends and family may come together to help you with that initial down payment. In cases where you are putting up cash that has been gifted to you, a lender will value your transparency and ask for written confirmation that the source of this cash is not a loan, rather its a true gift. Indicating a gift versus a loan will show that you have no obligation to repay the money that is being used as a downpayment, thus reducing risk in the transaction and making this use of funds permissible.
6. A Driver’s License or Official Government Photo ID
You can’t board an airplane with a photo ID and you cannot borrow money without one either. This is a simple ask of buyers so put on a smile and be ready to present a driver’s license, military identification, or some other official photo ID to prove that you are who you say you are.
7. Your Rental Payment History
At some point, buying a home for everyone is a first. For those who are currently renters or are first time homebuyers, be ready to show your rental payment history. Many of the online payment systems will allow you to easily download your historical rent payments or you may show proof of cashed checks. If you can’t track this down, some landlords will be so kind as to provide a written statement that you are an ideal tenant who has paid your rent on time.
These Documents Validate Your Home Loan Application
The financial world is all about give and take with a measure of risk and return. By reviewing your home loan application and validating the information within it using these documents, your lender is effectively reducing their level of risk. Ensuring that you are who you say you are and that your application is free of error goes a long way when determining your approval status and your anticipated down payment requirements and loan interest rate.
The FHA Loan Search team would like to remind you that everyone is special and specific buyers may be asked questions that are custom to their needs and situation.