To show sellers you’re serious and give yourself the ability to make an offer quickly, apply for a pre-approval for a home loan. A pre-approval is stronger than a simple pre-qualification letter because it’s based on your income and credit score, and thus, your ability to obtain financing. Here are the documents you need to gather to start a mortgage application:
It’s a small thing, but the lender needs to verify you are who you say you are. A valid driver’s license or passport will do the trick.
Credit History and Debt Information
Your lender will review your credit profile to gauge your risk as a borrower and determine a reasonable loan amount. If you have several outstanding debts, it could affect your ability to get pre-approved for the amount you desire.
Credit history is just as important. The lender wants to see whether you pay your bills on time. So having other outstanding debt isn’t necessarily a bad thing if you can keep up with it. Now, if you have negative marks on your report, be prepared to explain in writing why they occurred. Special, one-time circumstances are often viewed differently than habitual late or missed payments.
Most lenders request at least two years’ worth of tax returns to gain a clear picture of your financial standing and to confirm your reported earnings have been consistent over time. You’ll likely sign a Form 4506-T, which gives the lender the authority to request these documents from the IRS.
Pay Stubs and Other Income Documentation
While tax returns show overall financial health, pay stubs, W-2 and 1099 forms, and/or other proof of income (for example, child support payments, if you choose for these to be considered) help show your current earnings. Based on this information, the lender can determine a mortgage payment you might comfortably afford.
Bank Statements and Other Assets
A mortgage lender wants to ensure you’ll have money left in your accounts once the down payment and closing costs come out and you have to start making monthly payments. Providing current bank statements will show the flow of money in and out of your account and what you have saved. Lenders typically want to see the equivalent of several months of mortgage payments in your savings. In addition, they may ask to review any investments or life insurance policies you carry, which could help cover costs in a financial emergency.
If you’re being gifted a sizeable amount of money from a relative or friend for the down payment and closing costs, you’ll need a “Gift Letter” stating the purpose of that deposit in your account and the giver’s relationship to you. The letter should clarify that you’re not expected to repay that amount of money. Again, lenders want to ensure you have funds left after the home purchase and that you’ll be able to afford your monthly payments. Therefore, it’s important to differentiate a gifted amount of money from your outstanding debts.