I’ve seen many people become overwhelmed with the vast amount of mortgage documents that are often required in order to purchase a home. Since first-time homebuyers make up about 30% of all home buyers, it’s no surprise that this can be a shock. About 70% of the people we help at Bayou Mortgage are first-time home buyers.
Adding further confusion to the fray is the popularity of online lenders who claim to get your pre-approved in minutes from an app right on your smartphone. The mortgage approval process is simply an assessment of your credit, income, and assets. That data is plugged into a system that determines what you can be pre-approved for.
The issue is that those systems rely solely on data the user puts in, users who have never purchased a home before.
Documents Needed for a Mortgage Application & Pre-Approval
The only way to truly have confidence in a mortgage pre-approval is to have that pre-approval be based on documents the lender and underwriting are actually going to review.
Read: How To Avoid a Messy Mortgage
There are three categories of documentation your lender should be reviewing before pre-approval your home loan.
- Income
- Debt/Credit
- Assets
Income Mortgage Documents
When it comes to income mortgage documents, your loan officer is looking to verify the income you put on the application. Once your loan officer reviews these documents, they want to calculate your income the same way the underwriter will. You may put that you make $3500 a month but once your income is calculated, it’s actually $2800.00 That reduction in the income that can be counted will heavily impact the amount of house you’re allowed to purchase.
Types of Income
What type of income you receive is key in understanding how it needs to be calculated.
Hourly
If you have hourly income you are going to be paid an hourly rate based on the number of hours you work. If you work between 32-40 hours per week, that is considered full-time income. Since hourly income can fluctuate because you may work more or fewer hours, the loan officer has to use your YTD income.
Mortgage Documents Needed for Hourly Income::
- Full 30 Days of Paystubs
- Last Two Years W2’s
- Written Verification of Employment
Salary
Salary income is going to be the easiest most straightforward type of income a person can have. It’s the easiest to calculate because salary-based income is guaranteed.
If you receive a salary of $60,000 a year your loan officer will simply take your annual salary, and divide it by 12. That number, $5,000 is your monthly gross income and will be used on your application.
Mortgage Documents Needed for Salary Income:
- 30 Days of Paystubs
- 2 Years of W2’s
- Verbal Verification of Income
Commission
Commission-based income is income where you are paid a commission based on a product or service you sell. Commission like the rest of the income types we’re going to discuss is considered variable income.
Since this income is variable you can’t calculate it as straightforward as you would other types of income. If you made $7,000 in commission last month, that doesn’t mean your income will be $7,000 per month.
The loan officer is going to take the last two years of your commission income and average it over 24 months. This means if you earned $45,000 last year in commission and $60,000 in commission income this year. Your gross monthly income would be $4375.00
If you don’t have two years’ worth of commission you won’t be able to use that income in order to qualify.
Mortgage Documents Required for Commission Income:
- Full 30 Days of Paystubs
- Last Two Years W2’s
- Last Two Years Tax Returns
- Written Verification of Employment Covering 2 Years
You can also provide your final paystub for the last two years to allow your loan officer to calculate your commission income while they wait on the Written Verification of Income.
Overtime
Overtime income is going to be treated just like commission income. If you’ve been earning an extra $500 per month in overtime recently, that doesn’t mean you’ll be able to count the full amount as income.
Like Commission, if your overtime income will average over the last two years. The amount of overtime you earned over that time frame will be added together and then divided by 24.
Documents Needed For Overtime Income:
- Full 30 Days of Paystubs
- Last Two Years W2’s
- Written Verification of Employment (2 years)
Bonus
In order to use bonus income, it must be recurring and not one-time. It doesn’t matter if it’s once per year, once per quarter or any other variation. The most important thing is that it’s received regularly.
Bonus income is average over the last two years. So if you received a $5000 bonus this year but only a $1000 bonus last year, you won’t be able to use $5000. Since you’d need to average them your monthly income from bonus would be $250.00
Bonus Income Documents:
- Written Verification of Employment (Last 2 Years)
Self-Employment
When it comes to self-employment income, things change quite a bit. Unlike employment income where you are able to use your gross income, self-employed borrowers can only their net income. So if you have a business that’s doing $100,000 a year in sales, but you only net $30,000 after expenses, that is the income the lender is going to approve.
There are many different types of self-employed borrowers.
- Sole Proprietors
- LLC
- Partnerships
- Corporations
- Farm
Each of these different types of incomes is going to file their taxes differently and thus the types of documents required will be different.
For LLCs and Sole Proprietors, you’ll file a Schedule C, while Partnerships will file a Schedule E and potentially have Business tax returns as well.
Self-Employed Income Documents:
- Personal Tax Returns with all schedules
- Business Tax Returns (if you own more than 25%)
- K1’s
- Business Bank Statements
- YTD Profit & Loss Statements
Self-employed tax returns are usually a larger document than just a standard tax return. When providing these documents to your loan officer, you’ll need to provide them in pdf format.
Debt Mortgage Documents
The next category of documents you’ll need to provide are documents that prove what type of monthly debt payments you have to make. These documents are important because your current monthly debt is another factor that determines what you can be preapproved for.
Your monthly income and your monthly debts are used to determine your debt-to-income ratio, which tells lenders how much you can afford, as well as your ability to pay back the loan.
Credit Report
The first thing that happens when you complete your mortgage application, is your lender is going to pull a credit report. That credit report will have your three different credit bureaus on it, with three different mortgage fico scores.
Your credit report shows the lender your monthly debts, balances, and any debts you may have not paid back. Your credit report can also show your address history if you have any bankruptcies or foreclosures as well. It also tells lenders what credit you’ve been applying for by showing all of your hard inquiries.
Derogatory Events
If you’ve had any negative credit events like bankruptcies or foreclosures, you’ll be asked to provide documents to prove that.
Bankruptcies you’ll need:
- Discharge Paperwork Signed by the Court
- Schedule of Creditors
Foreclosures
You’ll need to provide documentation to prove when the foreclosure was complete, as the waiting period starts on that date.
Child Support
If you have to pay child support, which you’ll need to make sure to put on your application, you’ll need to provide your child support documents from the court. The lender can see child support payments that come out of your paystubs or your bank statements, but you’ll need the signed court order to prove the amount you are required to pay.
That payment will be added to your monthly debt and does affect your debt-to-income ratio.
Divorce
Similar to child support, if you’ve been divorced you’ll need to provide your divorce decree and any property settlements you may have.
New Accounts
If you’ve opened any new credit accounts that aren’t on your credit report, you’ll need to provide the promissory note or statements to show the balance and monthly payments.
Lenders will use the inquiries on your credit report to ask you about potential new credit accounts, as well as internal monitoring systems that alert lenders to new accounts.
Other Properties
If you own other properties, you’ll be required to provide documentation for those properties. This includes mortgage statements, annual insurance premiums, and tax bills.
If the home(s) doesn’t have a mortgage, we will be required to prove that the home is owned free and clear with a property profile, which can be provided by the title company.
Tax Debt
For borrowers using government loan products, FHA, USDA, VA if you owe back taxes, those taxes have to either be paid in full or set up on a payment plan. If you set up a payment plan you’ll need 3 months of payments before you can resume, and those payments cannot be prepaid.
You’ll need to provide documentation of the payment plan from the IRS as well as proof of three payments.
Asset Mortgage Documents
Finally, during the mortgage process, you’ll need to provide documentation that proves you have the funds to cover your “cash to close”.
Cash to close is the total of your down payment and closing costs, minus any seller or lender credits, and escrow deposits. You must be able to prove with a paper trail that you have these funds.
Your cash to close cannot be in cash, it must be in a bank, and if you have any large deposits outside of payroll you’ll be required to document where those funds came from.
Bank Statements
With banks statements, your lender is going to require the most recent 60 days of bank statements for any account being used to cover your costs. If you frequently make transfers between accounts, you’ll also be required to provide statements from each account you transfer to and from.
Your bank statements should include:
- Account Number
- Your Name
- Address
- At least the last 60 days of transactions
If you’ve made any large deposits outside of payroll or transfers, you’ll be required to document those transactions.
Why Do I Have To Provide My Bank Statements?
Retirement Statements
If you are using retirement funds, you’ll need to provide your most recent statement, and possibly a transaction history. This is because retirement accounts often run for 90 days so the most recent 60 days may not be available.
You’ll also need to provide a document called your terms of withdrawal, which your financial institution will provide.
Gift Funds
If you are receiving gift funds, you are going to need to provide three documents:
- A Gift Letter
- Proof of Funds From The Donor
- Proof of Funds In Your Account
A gift is money provided to you that isn’t required to be paid back and this is what is signed on a gift letter. Your lender will need the donor and the borrower to sign the gift letter. In addition, the lender will ask for at least a 30-day bank statement from the donor, and an updated statement from the borrower showing the funds leaving the donor’s account and entering the borrower’s account.
Other Mortgage Documents
In addition to the documents listed above, you’ll also have a few other documents that will be needed during the process.
- Signed Purchase Agreement
- Driver’s License
- Social Security Card
Mortgage Loan Documents Checklist
- Last 30 Days of Paystubs
- Last Two Years W2’s for All Jobs
- Last Two Years of Tax Returns
- Most Recent 60 Days of Bank Statements or Retirement Statements
- Written or Verbal Verification of Employment
- Credit Report
- Driver’s License
- Social Security Card
How to Technology Helps:
One of the best things about recent innovations is how technology can help in the mortgage process. We have online systems that allow you to easily upload your documents into a secure online portal.
We can pull your bank statements with a simple online system that allows you to sign in to your online account (which we don’t see) and then provides us with your statements.
If your employer uses a payroll provider on the work number, we can even digitally obtain your written verification of employment. There are even new options in the works that will allow us to verify your income with direct deposits on your bank statements.
