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What you need before applying for a mortgage

January 25, 2017
When applying for a mortgage, make sure you're prepared with the right paperwork.

Buying a home is very different from any other purchase, which is probably for the best. After all, since it is likely the biggest purchase of one's entire life, it's natural that things will be a bit more complicated. For a mortgage lender, home loans represent an expensive risk as well. That's why applying for a mortgage will require hopeful homeowners to inform a lender about almost every aspect of their financial history.

While there are several different documents that most lenders require, they usually aren't out of the ordinary. In any case, it always helps to be prepared if you think you are ready to apply for a mortgage.

Tax and income documents

Lenders will need to see a few different tax documents before agreeing to loan you money. They also will use these and others to verify you earn a steady income. According to Realtor.com, the average person working as a salaried or hourly employee will usually only need to supply the last two years of W-2 forms, as well as recent pay stubs. If you own a business, are self-employed or receive income from other means, it will get more complicated.

  • Profit statement:  This generally only applies to self-employed applicants and business owners. A profit statement is also known as an income statement or profit and loss statement. This needs to be as detailed as possible for a lender to approve.
  • Tax returns:  As Realtor.com explained, most W-2 wage earners with no additional income won't always need to submit a tax return. However, you most likely will if you receive income from rental property, Social Security, a pension, a business partnership or any other Schedule C income. In any case, borrowers should plan to provide returns just to be sure.
  • Debts and assets

Assets and debt

How much you earn is a major part of what lenders use to determine how much house you can afford. But they also need to know how much you already owe, as well as how much you are worth beyond cash income. As Bankrate explained, lenders will usually calculate your debt-to-income ratio, which is a simple formula equal to your total debt divided by total income. According to the Consumer Financial Protection Bureau, anyone with a debt-to-income ratio over 43 percent will likely be unable to obtain a mortgage.

"A high debt-to-income ratio may make getting a home loan difficult.”

Assets will need to be reported as well. These are verified by bank statements and cross-referenced with tax and income information. Any savings or investments you own should be disclosed. Proof of assets is vital for a lender because it demonstrates that you will likely be able to pay the mortgage for the foreseeable future.

Bankrate also noted that renters who are applying for a mortgage will have to provide 12 months of canceled rent checks, along with bank statements. This proves that the rent was consistently paid on time. If these can't be provided, you could also provide your landlord's contact information, allowing the bank to check this out. Late rent or mortgage payments may also show up on a credit report, which is another common request from lenders.

Besides these documents, other mortgage providers may ask for additional information. This includes things like bankruptcy discharge confirmation, information about children if the buyer is receiving child support as income, and a copy of a divorce decree in some special circumstances. All of these documents should be provided as soon as possible, and nothing should be crossed out or altered. Bankrate also remarked that hopeful buyers should be ready with updated documents, in case the ones provided expire.