Mortgage Advice

What Do I Need to Buy a House?

September 25, 2014

If you’ve been thinking about buying a home, and are ready to take the next step it’s time to start gathering all the documents you’ll need to get pre-approved for a mortgage. Not only will having a pre-approval help make your home search smoother, it will make the application process smoother, too!

By obtaining your financial documents up front, we’ll already have most of the information we need to process your application once you do find your dream home. This will allow us to get things moving pretty quickly.

Why do mortgage lenders need so much information?

The answer is two-fold. Buying a house is a major investment, both for the buyer and the lender. Not only do we want to assess the risk of lending, we’re there to protect homebuyers’ best interest, too.

It begins with collecting documents that will help us paint a picture of your financial situation—things like your income, assets, debt-to-income ratio, credit history, etc. By analyzing this information, we’ll be able to determine whether you meet the required lending guidelines, and most importantly, determine which loan programs are a good fit for you.

In short, the more information we can provide to our underwriting department, the easier it will be for them to issue a decision on your loan. Without that documentation, we won’t be able to issue a decision on the loan. The sooner you can provide your lender with all the necessary paperwork, the smoother the entire process will be.

What do I need to buy a house?

When you apply for a mortgage loan, there are some key criteria the lender will evaluate, including (but not limited to) your income, assets, credit history and liabilities. Any documentation related to these factors will be requested at the time of application.

To help you stay on track when it comes to gathering the required mortgage loan documentation, my colleague Michael Fischer put together some best practices and guidelines to follow:

Bank statements. At the time of application, you will be required to provide your lender with two consecutive months of current bank statements. This information will be used to document the source of funds you will be using to pay your down payment and verify your ability to repay the loan. When submitting bank statements to your lender, keep in mind:

  • All pages of the bank statement are required. It must be a full 30 or 60-day history that includes the bank name, account number and your name.
  • If you are providing a history printout from the bank, it must be signed, stamped, and dated by a teller on every page.
  • If it is a history printout from the Internet, it must show the HTTP address on the bottom of the page so that it can be verified if necessary. It must also show the full account number and bank name.
  • Every line item of your 30-60 day bank statement may be reviewed to see if there are any deposits that cannot be attributed to your normal work pay. Any deposits outside of normal work-related pay for the borrowers on the loan could require additional written explanation and/or documentation. So, avoid making any un-documentable deposits or cash deposits into your bank accounts.
  • If you do not have your paycheck automatically deposited into your bank account, attempt to deposit your check in its entirety, and keep a copy of the check. If you need to withdraw cash from each paycheck, withdraw it after the deposit, or use the ATM.
  • Make sure you have enough money in your bank account to cover the funds needed to close before you start shopping for a home.
  • Avoid changing bank accounts prior to or during the loan process if at all possible.

Liabilities. When evaluating your ability to repay the loan, mortgage lenders will calculate your debt-to-income (DTI) ratio. To do this, they will take into account any other debt obligations you may have, such as credit card debt, car payments, etc., and divide the sum of your debts by your gross monthly income. To improve your chances of qualifying for a mortgage loan:

  • Avoid opening new credit lines, or taking on additional debt, without consulting with your loan officer first. You may be asked to clarify any credit inquiries you have made within 90 days of loan application and if they resulted in new credit.
  • Pay all of your existing debts on time. This will demonstrate that you can be trusted to repay your loan and make payments in a timely manner.
  • If you have student loans, consult with your lender to determine what documentation you’ll need to provide. If you are applying for a conventional loan, your student loans will be factored into your DTI ratio whether they are deferred or not. If you are applying for an FHA or VA loan, your student loan payments will be excluded from your DTI ratio as long as you can provide documentation that verifies your loans are deferred at least 12 months from the date of closing.
  • If you’re obligated to pay child support, you will be required to provide a divorce decree or court order documenting the amount you’re required to pay.

Employment verification. When applying for a loan, it is vital that you can verify a stable source of income that can be used to repay the loan. As you are going through the mortgage process:

  • Avoid changing jobs, unless it is unavoidable. If possible, wait until your loan has officially closed before pursuing new career opportunities.
  • Avoid taking time off of work if it is not normal vacation time, as your most recent paystubs are the most important.
  • If something happens that requires you to take an extended leave of absence, inform your loan officer immediately so they are aware of the situation and how this will affect your income temporarily.

Gift money. Gift funds are a perfectly acceptable down payment source for conventional and FHA loans, but they must be documented properly. Keep in mind, cash gifts are not an acceptable form of funds. Required documentation will include signed and completed gift letters, a copy of the gift check, a copy of the deposit slip into your account and possibly a copy of the donor’s bank statements.

Tax returns. At the time of application, you will be required to provide your two most recent federal tax returns and will be asked to sign a form that allows the lender to potentially request information on your filed tax returns. These requests go to the IRS and are used for loan underwriting and audit purposes. Please be aware that the lender may ask additional questions and may need to know the following:

  • Does the address you used on your most recent return match your current address?
  • Do you own any businesses or claim any income from businesses that you have not included on your loan application?
  • Was your tax return filed jointly with a person that is not on your mortgage loan application?
  • If you are not self-employed, do you take any tax deductions for unreimbursed employee expenses?
  • If you are self employed be aware that your lender may need two years of personal tax returns, as well as two years worth of corporate tax returns.

Although everyone’s financial situation is different, everyone has to adhere to the same process when it comes to submitting documents for a mortgage application. Due to federal regulations, mortgage lenders are required to review certain criteria, no matter who is applying for the loan.

The key thing to remember as you’re going through the mortgage process is that you and your loan officer are an absolute team. In order to get your loan approved and closed in a timely manner, we need your help obtaining the required documents.

If you have questions about the information included in this post, or have specific questions regarding your financial situation, send us an email! We’d be happy to provide you with an answer and discuss your options.