Getting a mortgage can be a lengthy process, taking between 30 and 45 days to close on a loan.
But while the process of getting a home loan can be intimidating, exciting, and terrifying at the same time, preparation is your best weapon for success.
Here's the deal:
Since a mortgage is a long-term commitment, your lender needs to be confident in your ability to repay the debt.
Prepare to be candid about your finances and submit paperwork to document your income and assets.
And part of preparation is knowing which documents you’ll need for a conditional and a full approval.
What Do You Need for a Conditional Mortgage Approval?
A pre-approval is often the first step when applying for a mortgage. You’ll fill out an application and include your income details.
Next, your loan officer takes a cursory look at your credit report.
From here, they determine whether you’re a candidate for a home loan.
Based on your credit report and income, you also learn what size mortgage you’re eligible to receive.
A pre-approval carries weight, but it doesn’t carry as much weight as a conditional approval. With a conditional approval, an underwriter digs a little deeper into your finances and reviews your supporting documentation.
Documentation is how underwriters verify or substantiate stated information on your application.
This includes your income and assets, which play a huge role in a loan approval.
Documents you’ll need include:
1. Tax Returns or W-2s
Although you’ll state your income on a mortgage application, lenders can’t take this information at face value.
They have to verify your income to determine how much you can afford to spend on a house.
For this matter, you’ll receive instructions to submit copies of your tax returns or W-2s from the past two years. Tax returns are necessary for self-employed borrowers. But employees can submit their tax returns “or” W-2s.
If you’re self-employed, make sure you forward all pages of your tax return.
The underwriter needs to know your company’s annual revenue and business expenses.
This is how they calculate your net profit.
Keep in mind:
You’ll also sign a form that authorizes your lender to get your tax return transcripts from the Internal Revenue Service (IRS).
Mortgage lenders must verify an applicant’s tax return with the IRS to prevent fraudulent mortgage applications. This also prevents applicants from misrepresenting their income.
Your mortgage lender can request mailed or electronic tax return transcripts from the IRS. Transcripts usually arrive within five to seven days.
2. Paycheck Stubs or Year-to-Date Profit and Loss Statement
Mortgage lenders don’t only review your previous tax returns and W-2s.
Some also ask for your most recent paycheck stubs (for the past two months). This is to ensure that you’re still employed.
You may also need to provide an employment verification letter from your job.
A review of your most recent paycheck stub reveals how much you’re currently earning monthly. It also reveals your year-to-date income.
If you’re self-employed, you may need to submit a year-to-date Profit and Loss statement.
This form summarizes your business income and expenses for the year thus far.
Your accountant can prepare this statement for you.
3. Credit Report
This isn’t a document you provide.
Rather, the mortgage company will pull your credit report and review your credit history.
Underwriters check for any recent collection accounts, judgments, late payments, and past due balances.
You don’t need perfect credit to qualify for a mortgage loan.
Even so, you may not qualify for some loan programs if you have more than two 30-day late mortgage or installment payments in the previous 24 months.
The bank’s underwriters will also check your credit report to get an idea of your current debt load. Be aware that high credit card payments, auto loans, student loans, and other debt payments affect purchasing power.
The more debt you have, the less money you’ll qualify for when buying a house.
It is smart to pay off as much debt as possible before submitting a home loan application.
4. Bank Statements
Being asked to provide copies of your bank statements for the past two months might come as a surprise.
These statements are necessary during the mortgage process because underwriters need to confirm the source of your down payment and closing costs.
The minimum down payment required for a mortgage is between 3 percent and 5 percent, with closing costs ranging from 2 percent to 5 percent.
In addition to bank statements, you’ll need to submit statements for your retirement accounts and other investments.
If statements show that you don’t have enough cash or assets for mortgage-related expenses, you’ll need to explain how you’ll cover these costs.
5. Gift Letters
The good thing about buying a home is that you don’t have to use your own funds for a mortgage.
Several mortgage programs allow borrowers to use gift funds for their down payment and/or closing costs.
What are gifted funds?
These are funds you receive from a relative or an organization.
There’s a caveat:
You must submit a gift letter to your mortgage lender.
This letter should include the name of the donor, their relationship to you, and the amount of the gift. In addition, the donor must indicate in the letter that funds are a gift, and not a loan. Some mortgage lenders will not allow you to borrow funds for a home purchase.
The amount you can receive as a gift varies. With an FHA home loan, 100 percent of your down payment and/or closing costs can come from a gift.
With a conventional home loan, 100 percent of your down payment and/or closing costs can be a gift if you put down 20 percent or more.
If you put down less than 20 percent, you must contribute some of your own funds.
This minimum contribution varies.
6. Documents for Alternative Forms of Credit
Getting a mortgage without a prior credit history is difficult, but not impossible.
Typically, qualifying will require compensating factors.
These include sufficient income, two to three month’s of mortgage payments in reserves after buying the house, and a larger down payment.
The underwriter will also request alternative forms of credit. This way, they can gauge how well you manage your personal expenses. These alternative forms can include a copy of your rental history from previous landlords and utility statements.
Demonstrating a history of paying your bills on time can help you qualify for the mortgage with no credit history.
What Do You Need for a Full Mortgage Approval?
Even though a conditional approval by an underwriter is better than a pre-approval, the loan isn’t guaranteed until you have a full approval and you’re cleared to close.
Once you submit a signed purchase agreement to the lender, you’ll receive a Loan Estimate within three business days.
This document is designed to make your loan costs and terms as transparent as possible.
It includes the agreed upon purchase price for the property.
In addition, it has your estimated interest rate (subject to change), your estimated monthly payment, and the amount you’ll need to bring on closing day.
The Loan Estimate also outlines other terms of the mortgage.
If you agree to the terms on the Loan Estimate, notify your loan officer and express your intent to proceed.
Getting an appraisal
Keep in mind that before you get a full approval and the green light to close, a third-party must appraise the home you’re buying.
An appraisal is necessary because you cannot finance more than a property’s worth. So if you’re buying a house for $250,000, the house must be worth at least $250,000.
The appraisal is a short process, taking less than an hour.
But it usually isn’t completed until a few weeks before closing. The appraiser will walk through the property you’re buying and note its condition. The appraiser then compares the property with similar homes in the area. They pay special attention to recent comparable sales.
The bank will not approve your mortgage if the home’s sale price is more than the appraised value. If the appraisal comes in low, you’ll need to renegotiate the sale price with the seller.
You’ll either pay less for the property.
Or, come up with a larger down payment to make up the difference.
With all your documents submitted and the appraisal completed, the final step of getting a mortgage is receiving your Closing Disclosure form.
This document arrives three business days before closing.
It is like the Loan Estimate. But instead of estimates for your mortgage terms, the Closing Disclosure has your actual loan terms.
This document eliminates surprises at the closing table.
You know how much you’re paying for the property, your interest rate, and your monthly payment. Additionally, you know exactly how much to bring to the closing table.
Once you receive this document, you can rest easy knowing that you’re about to get the keys to your future home.