What Paperwork Do I Need to Get a Mortgage?
Getting the paperwork needed for a mortgage application can seem like a daunting task if you haven’t been that great about keeping documentation over the years. The biggest hiccup for most people is getting copies of their tax returns. Whether it’s because they did their taxes on a friend’s computer or simply threw everything away, tax returns seems to be the biggest mental hurdle for a lot of first time home buyers.
Good news! That one’s probably the easiest to check off (more on that below).
Most people will only need to check off 5 things to complete their mortgage application. Do you know what they are?
Most lenders want to see two years’ worth of tax returns. They want two so they can see that your earnings are consistent and that they haven’t gone down.
Banks knowing how much you make is their first step towards approving you.
Your lender will most likely pull your tax returns for you, so it’s unlikely necessary that you need to go digging through your closet or father’s laptop. You’ll be given a form to sign, which gives whatever bank or lender you’re working through the right to access your tax returns. The form you’ll most likely sign is called 4506-T.
If the lender for whatever reason wants you to provide copies, you can go to the IRS and request a copy. They have a few options available, and are able to provide tax returns for as far back as six years from the previous tax year.
2. Bank Statements/ Assets
Bank statements and other assets are used to verify that you have enough money to pay for the following:
Earnest money deposit (typically $1,000)
Down payment (depending on the type of loan you plan to use, you might need to have 3.5%- 20% of your future home’s purchase price in your account)
Closing costs (can be anywhere from 2% to 5% of your home’s purchase price)
A few months’ worth of reserves should you lose your job
Sourced and Seasoned
Lender’s also require bank statements so they can verify where your money is coming from and how long it has been there. In bank lingo, this is referred to as ‘sourced and seasoned.’ If your down payment and earnest money deposit haven’t been in your account for at least 30 days, then it’s considered not seasoned. If this is the case, the bank will then want to know where the money came from and why it’s in your bank account.
If your money has been gifted:
‘Gift’ deposits are OK as long as you can provide letters from your benefactors explaining that the money is a gift and not a loan. If it’s a loan and you’re expected to pay it back, the payment schedule will have to be calculated into your monthly DTI (debt-to-income). Just know that banks typically don’t like to see gifts used as a form of down payment.
If your money comes from a down payment assistance program:
As with gifted money, lenders don’t like to see loans deposited into your account from a source that is not work related. It doesn’t mean you’ll be denied a loan, but it doesn’t look great. If you plan to get a loan for a down payment, you’ll likely need to work with a lender who approves of using this purchase method.
What will most likely happen is that in order for you to get approved for the DPA, you’ll have to work with a certain set of banks. So, all in all, no worries.
How long does a down payment need to be in a bank account?
2-3 months. Long enough to verify it didn’t just show up overnight.
Why so long? Why is ‘sourced and seasoned’ so important?
You’re an honest person, but the same can’t be said of everyone. Not too long ago, drug dealers used to make their money ‘honest’ by investing in real estate. Verifying where money comes from discourages citizens from engaging in illegal activity, but also shows banks that you are capable of stewarding your money well.
3. Pay stubs/ W-2s/ Proof of income
Tax returns are used to get an idea of your past financial history, whereas pay stubs are used to understand your current financial health. How much do you have to work with each month, and how much do you have left over after paying upon your monthly debts? These questions are answered in part by looking at your pay stubs, W-2s, or other means you use to verify your proof of income.
How many pay stubs will you need?
Expect to need 2-3 months’ worth of pay stubs, but your lender will specify.
What if you have nontraditional income?
If you’re self employed or receive money through child support, you’ll need to show your chosen lender proof that you receive income on a regular basis. Depending on your income, you may have to get creative with how you do this, but as a general rule of thumb, direct deposits or 1099 forms work.
4. Photo ID
A photo ID proves to the bank that you are who you say you are. Identity theft is a relatively easy thing to accomplish with credit cards, but it’s not so easy when getting a mortgage. Don’t get upset by this. You definitely don’t want some stranger taking out a loan in your name!
For this you can either scan or take a photo of your ID with your phone. If you use a phone, put a sheet of white paper below your ID so whoever’s looking at it can see anything written on the transparent areas.
What types of ID can be used?
It varies state by state. Some states have different requirements or disqualifications. For example, in California you can used an expired ID as long as it hasn’t been five years since its expiration date.
IDs come in two categories: Primary and Secondary. If you’re asked to provide two forms of ID, one of the IDs must have your photo and signature on it.
Primary IDs include:
Alien Registration Card
Commercial Driver’s License
Employment Authorization Card
Federal Government Employee ID Card
Nonresident Alien Border Crossing Card
Non-immigrant Visa and Border Crossing Card
Permanent Resident Card
State ID Card
Secondary IDs include:
Matricula Consular Card
Property Tax Bill
Social Security Card
Voter’s Registration Card
5. Rent History
If you have never owned a home, lenders will want to see that you’ve been able to pay your rent on time. To prove that you are responsible, you can either:
Get your landlord to provide some sort of documentation to prove that you paid your rent on time
Provide a year’s worth of canceled rent checks (which proves the check’s were indeed cashed)
If you have never rented, it may be more difficult for you to get approved for a mortgage. All other areas of your credit report must be in top form, or else you might need to get a cosigner.
Not too bad, right?
If you’re one of those people who perspire at the thought of taking care bureaucratic business, fear not. All requirements mentioned above can be accomplished with very little effort on your part. In fact, some lenders only need your consent, and will take care of most everything themselves.