How to Get Pre Approved for a Mortgage
Getting pre-approved for a mortgage is an important step in the process of buying a home.
A pre-approval means that you've met with a mortgage lender and you're an ideal candidate for financing.
This is the type of buyer that sellers prefer. Including a pre-approval letter with a home offer shows that you're a serious contender. Sellers are more likely to accept your offer.
But getting pre-approved involves more than providing income information.
You must also provide supporting documentation to back up income claims.
Documents Needed for a Mortgage Pre-Approval
A mortgage pre-approval isn't required, but it's often the first step in the home-buying process.
It's an important step because it determines whether you can qualify for a mortgage. It also reveals how much you can afford to spend on a property.
To be clear:
Mortgage pre-approval goes further than getting pre-qualified for a mortgage.
With a pre-qualification, you'll fill out a basic online form and provide income, debt, and credit information. But at this stage, the lender doesn't verify this information.
The bank "does" verify stated information during the pre-approval process. So, prepare to provide the following list of documentation:
1. Tax returns from previous two years
To verify the consistency of your income and employment, banks need to see copies of your tax returns from the previous two years. This applies whether you're self-employed or an employee.
Many mortgage programs require at least 24 months of consecutive income.
Ideally:
You should remain with the same employer during this two-year period.
If you switch jobs, a lender might still approve your mortgage, as long as you've worked in the same field for two consecutive years.
Make copies of your returns and forward this information to your mortgage lender.
Getting old tax returns
If you don't have your returns, contact your tax preparer to get a client copy.
If this isn't an option, contact the Internal Revenue Service to get your tax return transcript. This will have most line items from your originally filed tax return. Or if you need an actual copy of your tax return, request one from the IRS for a $50 fee.
It can take up to 30 days to receive a tax transcript, and up to 75 days to receive a copy of your actual tax return.
2. Paycheck stub or Profit and Loss statement
Not only does a mortgage lender need copies of your tax returns from the previous two years. They also need recent income information.
This confirms that you're still employed, and that your income hasn't changed much from the previous year.
If you're an employee, you'll need to submit your most recent paycheck stub. So make sure you hold onto this information after getting your paycheck.
If you're self-employed
If you're self-employed, you will likely need to submit a year-to-date Profit and Loss statement.
This shows your business income for the year thus far, and confirms that your current income remains sufficient for a mortgage approval.
You need to contact your tax preparer or accountant to get a year-to-date Profit and Loss statement.
3. Proof of rental income
If you receive monthly income from a rental property, and you want to use this income for qualifying purposes, you'll need to provide information about the property.
This includes the address of the property and the copy of a tenant's lease.
Your lender will use this information to verify the amount you receive in rental income each month.
Keep in mind, too, that the bank will compare this information with what you've listed as rental income on your tax return.
The good news:
Some banks also allow you to use projected rental income to qualify for a mortgage.
If you currently own a house and plan on renting it out, the bank will conduct a rental analysis to estimate the potential rental income.
They'll use about 75 percent of this projected income for qualifying purposes.
4. Financial account statements
Buying a property is expensive and you'll have a lot of out-of-pocket expenses.
Today, many mortgage programs require a down payment.
This amount can range from 3 percent to 5 percent of the sale price, depending on whether you get a conventional or an FHA home loan.
In addition to this expense, you're responsible for closing costs. This fee can be an additional 2 percent to 5 percent of the loan. Therefore, buying a house will require some type of cash reserve.
Verification of funds
Before approving your mortgage, lenders need to verify the source of funds you'll use to cover mortgage-related expenses.
So, don't be surprised when the bank asks for copies of your bank account statements, retirement account statements, and brokerage account statements.
Typically, you must provide 60 to 90 day's worth of statements.
You can print these statements from your bank or brokerage firm's website, or contact the financial institution for paper copies. Make this request early as it could take a week or longer to receive these copies.
The bank's underwriter will comb through your statements to ensure you have enough funds on hand for your down payment and closing costs.
If you don't have enough funds in reserve, you'll need to explain how you'll get the cash before closing.
5. Rental history letter
If you rent an apartment or house, this monthly payment might not appear on your credit report.
The only exception:
Your landlord reports your rental payments to the credit bureaus.
Some mortgage lenders want information about your rental history. So you might have to ask your landlord for a letter confirming a good payment record.
It can take a while for your landlord to write this letter. If you plan on getting pre-approved in the near future, ask for one as soon as possible.
This also serves as a rental reference.
A reliable tenant who pays their rent on time builds a lender's confidence.
In most cases, you'll also pay your mortgage payment on time—especially if the payment is comparable to what you paid in rent.
6. Credit report (monthly debt payments)
Mortgage lenders also check your credit reports to evaluate your monthly debt payments when determining whether you qualify for a mortgage.
This also helps determine your pre-approval amount.
They'll compare your minimum monthly debt payments with your monthly income to determine affordability.
Typically, your mortgage payment should not exceed 28 percent to 31 percent of your gross monthly income.
Your total debt payments for the month, which includes the mortgage, should not exceed 36 percent to 43 percent of your gross monthly income.
To calculate your debt-to-income ratio, the lender will pull copies of your credit report. Applying for a home loan gives the bank authorization to do this.
7. Copies of any court orders
When applying for a mortgage, you can also use alimony and child support payments for qualifying purposes.
However, your lender will request copies of your divorce decree or other court orders to verify how much you receive in support payments.
They're strict rules regarding whether you're able to use child support or alimony when buying a home.
In most cases, you must have received these payments for at least six months before qualifying for a home loan.
Also, payments must continue for at least three years after closing.
8. Down payment gift letter
If you're using gift funds for your down payment and/or closing costs, you must provide your lender with a gift letter.
These letters provide information about the donor, the amount of their gift, and the donor must state that funds are a "gift." In other words, they don't expect repayment.
Now:
Most mortgage programs allow gift funds from acceptable donors. This typically includes immediate family members and certain organizations.
If you use gift funds, some loan programs require buyers to contribute a small percentage of their own funds.
The bank might require your donor to send the gift letter before getting pre-approved. Your lender may also provide a template to use.
9. Copy of your driver's license and Social Security card
Mortgage fraud is a real problem.
To prevent this:
Your lender will also need a copy of your driver's license or other state-approved ID, as well as a copy of your Social Security card. This is how the bank verifies your identity.
Final Word
Getting a mortgage involves a lot of paperwork and documentation.
Even when you think you've provided everything your lender needs, the underwriter may contact you requesting additional information.
Forward any requested information as soon as possible to keep closing on schedule.
For a smooth process, don't wait until after applying for a mortgage to gather pertinent information. Instead, have this information ready beforehand.
The sooner you send off supporting documentation, the sooner the bank can review your file and issue a pre-approval.
How to Get Pre Approved for a Mortgage
Source: https://www.mybanktracker.com/blog/find-my-answers/mortgage-preapproval-documents-needed-309022