All lenders require that you fill out a residential loan application. The application’s format is standardized — allowing lenders to use the same form — and captures basic information about your employment, assets, debts, and other personal information related to your ability to repay a loan. You can see what the application looks like here.
We can complete your application together, either over the phone or in person. A completed application lets me assess your financial situation and determine exactly what paperwork I’ll need to review before issuing a preapproval.
Once your application is complete, I’ll review it thoroughly and let you know what paperwork to provide. Lenders often notice things you might not realize are important, and seeing your paperwork lets me identify any items that might be missing or require further explanation. If necessary, I’ll request additional paperwork after my initial review.
What follows is a detailed description of the income and asset documentation you’ll need to provide for a preapproval.
Incomes fall into two categories, salaried and self-employed, and some buyers may even have a mix of the two. What the lender will need to see depends on how you’re compensated.
If you are salaried, you’ll be paid the same amount twice a month, once every two weeks, or once a month. To verify that you receive the same amount each pay period and to calculate your monthly income, I’ll need to see your two most recent paystubs. Lenders always use monthly rather than annual income for qualification purposes.
As a salaried employee, you will also need to provide W-2s from all jobs you’ve held over the previous two tax years. This lets the lender verify your most recent two years of work history.
Salary with Commission or Bonus Income
Many workers receive a base salary, as well as income from commissions or bonuses. Bonus and commission income can vary over time. For this reason, lenders want to see what you’ve earned over a meaningful period of time — the standard is the last two years, plus year-to-date. Lenders will then calculate a monthly average of the total bonus and/or commission income received over this timeframe for qualification purposes.
For example, if we’re working on a preapproval for you at the end of July, you’ll need to provide your paystubs for that month, as well as year-end paystubs for the previous two years. The lender will total your commission and/or bonus income over this period of time and then divide that amount by the number of months to calculate the average.
If you aren’t able to access your year-end paystubs for the last two years my office can send a verification of employment request to your HR department. A verification form is sent to be completed with compensation history covering the last two years plus year-to-date. Many companies contract with a third-party such as The Work Number to provide this service.
If you filled out one of the following tax forms, lenders consider this portion of your income as self-employed income:
|Salary paid from an entity you own
|Dividend, Interest, Capital Gains
|Income from investments
The paperwork you’ll need to provide depends on how your self-employed income is reflected on your tax returns. At a minimum, you must give the lender your two most recent years of tax returns.
It’s important to note that lenders underwrite income using federal, rather than state, tax returns.
If you receive income documented in a K-1, you’ll need to provide that form. And if you own more than 25 percent of the K-1 partnership or corporation, you’ll also need to provide returns for that entity for the last two years.
To determine the highest purchase price for which you qualify, lenders take the average of self-employed income from the past two tax years. This means I’ll need to calculate your monthly self-employed income by adding what’s shown on your last two years of returns and dividing that amount by 24 months – even if the prior year reflects only a partial year’s earnings.
If your income declined from the previous tax year, I’m required to exclude the prior year’s pay and divide the current year’s earnings by 12 to arrive at your monthly income.
Lenders don’t use income from self-employed sources from the current year for your qualification. That’s because you haven’t yet reported those earnings to the IRS, meaning they can’t be verified on your tax returns.
And what if you’ve only been self employed for one year? Because lenders generally require two years of documented self-employed income for qualification purposes, you may need to wait until this income is reflected on your returns for two years. There are some exceptions to this rule, and I can help you determine if it’s possible to use just one year of self-employed income for qualification.
Lenders want to insure you have the cash for a down payment, closing costs, and other expenses before they approve you. To verify your assets, you’ll need to provide them with all of your bank account statements from the past two months.
And don’t forget to provide all of the pages! It may seem like a minor oversight, but lenders can be sticklers for details. If your account statement says there are five pages and you provide only four, the lender will still ask to see the fifth page, even if it contains only boilerplate language.
In addition to the money you use for your down payment and closing costs, lenders also want to verify that you have a certain amount of cash in “reserves.” That way, if you lose your job after purchasing a property, you’ll have a cushion of money available for a certain number of months of housing payments.
The number of months required depends on the type of mortgage you get and the loan amount borrowed.
You can meet the reserve requirement using either liquid (nonretirement) or retirement accounts. If you choose retirement accounts, lenders take 60 percent of their value because those funds can’t be easily liquidated without penalty.
Here’s what’s required to document your assets:
|The most recent two months of account statements for your bank, brokerage, and retirement accounts — all pages. If your statements are provided on a quarterly basis, a statement for the most recent quarter is required.
|If money for the down payment on your new property is coming from the sale of an existingproperty: a closing statement from the sale.
|If money for the down payment is coming as a gift: a gift letter from the donor as well a statement for the account from which the gift funds will be withdrawn.
Deposit Paper Trails
If your money has been in your accounts for at least two months and appears on your statements for that time period, lenders consider the funds “seasoned.” However, if they see a large deposit, they’ll want to know the source and will ask for an explanation.
Lenders want to make sure the money you’re using for your down payment is your own and not someone else’s. Although this requirement has been in effect for many years, enforcement has become much more rigorous recently.
That’s because regulations put in place over the last two years require that lenders help enforce anti-money laundering laws. Since one way to launder money is to use it to purchase a home, lenders are now responsible for “paper trailing” deposits to your accounts to verify the funds are yours.
If your account statements reflect large deposits (generally $1,000 or more) that aren’t clearly labeled as payroll or a tax refund, you’ll need to provide a canceled check and an explanation.
If you don’t have the full amount for your down payment, you can get a gift from a family member. Gifts are described in more detail here.
Your credit history remains a huge deal to lenders. By looking at your track record of paying creditors, they can assess whether you’re likely to pay a mortgage on time.
I will run a credit report combining results from each of the three major credit-reporting agencies and showing three individual credit scores. Lenders generally use the middle score of the three when evaluating your credit history.
The report will also show detailed information about your open credit accounts, closed credit accounts, derogatory accounts due to late payments or collections, and other public information, such as bankruptcy or tax lien filings.
For jumbo loans, it’s not enough just to have a good score; that score must come from a robust payment history. Usually lenders require a minimum history of four accounts, either currently open or recently closed. Each account must have payment history covering at least two years.
And since jumbo loan guidelines aren’t standardized, different lenders may have different requirements. I can look at your credit history and let you know what will work for the loan options you are considering.
Credit scores range from 400 to 850. The chart below shows descending score ranges and their effect on your ability to get a loan.
|Entitles you to the best rates and lending programs available.
|Good, but will limit options in certain cases, such as loans for two- to four-unit properties or jumbo loans.
|In most cases, will limit your loan options and increase your rate, unless accompanied by a large down payment.
|In almost all cases, will increase your rate and limit your loan amount.
|Financing may not be available unless accompanied by a large down payment.
Fixing Credit Problems
It’s important to run your credit report early in the process so we’ll have time to correct any mistakes, boosting your score so you can save money and access better loan options.
If your scores are low, you may not be able to get the financing needed for your purchase. However, I can analyze your credit history and run a simulator to see if it’s possible to increase your scores. For example, paying down your credit card balances may boost your score, as will fixing incorrectly reported late payments.
While you could try to do this work on your own, dealing with the credit bureaus can be frustrating and slow. If you’re looking to buy a property soon, I can expedite the process.
Congratulations! Now that we’ve completed the loan application, documented your income and assets, and run your credit report, you’re ready to be preapproved. We’ll discuss what you can afford given your income and down payment limits.
We also discuss different mortgage options. Most people prefer to stick with a 30 year fixed loan to eliminate the risk that their rate will increase. Others opt for an adjustable-rate mortgage. After we come up with a plan together, I’ll give you a customized spreadsheet showing different loan options for your purchase.
As you view various homes, the spreadsheet will let you input different purchase prices or down payments to see how they will affect your monthly costs. And, of course, I’ll keep you updated on rates and revise the spreadsheet as needed.
Once I’ve received all of your paperwork and we’ve decided on your best loan options, you will be formally preapproved. I’ll update your agent so he or she can target properties in the appropriate price range.
As you search for homes with your agent, you may find yourself looking at properties above the price range we’ve discussed – or looking at property types you hadn’t anticipated. For example, you may have planned to tour only single-family homes but now you’re seeing condominiums you like. Or you may become interested in TIC units or multi-unit buildings.
By staying in touch throughout the process, I can look into increasing your maximum purchase price or see if other property types are an option for you. Then when you find a home you’d like to make an offer on, I’ll write a preapproval letter to your agent tailored specifically to that property. The letter will accompany your offer, letting the seller and listing agent know you’re qualified to buy the property.
Should your offer be accepted, you’ll have peace of mind knowing you are comfortable with the mortgage options we’ve discussed.