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13 Documents Mortgage Lenders Need From Homebuyers

One of the changes brought about by the foreclosure crisis was a realization that, before granting loans, lenders need to verify that borrowers can make their monthly mortgage payments.

That led to a number of changes in how mortgages are granted, including what is called the Ability to Pay Rule, which went into effect in January 2014. Borrowers now need to provide more documentation of income and assets so the lender can verify that you can, indeed, afford the house you’re buying with the mortgage you want.

“If it’s your personal residence, the lender has an obligation to determine and document that you can repay the loan,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage,” and a mortgage professional in the San Francisco Bay Area. “If you can’t actually afford and make the payments, you can’t get the house.”

Exactly what documents you’ll have to provide depends on your personal situation, including your credit profile, down payment, work history and the lender you’ve chosen. But if you want a loan, be prepared to document all the information you provide for your application.

“Not everybody likes to show everything you have, but when it comes to loan financing, it’s important to show what you have,” says Sylvia Gutierrez, a Miami-based mortgage professional who recently published “Mortgage Matters: Demystifying the Loan Approval Maze.” “You need to have a very detailed conversation with your loan office about what your legitimate sources of incomes are.”

A lender is also concerned about your debt, but most of that will be accounted for on your credit report, which your lender will acquire for you. But Fleming also asks borrowers if they have any debt that is not included on the report and asks for documentation that the client is making payments.

If two people are getting a mortgage together, the lender will need the documentation for both parties. If either has recently made large cash deposits, whether from a gift, selling stock or a bonus at work, the lender will ask for proof of how the cash was acquired. Those verification documents could include statements showing the stock sale, a gift letter or a pay stub listing the bonus.

“Documenting the source of cash – that used to be swept under the rug. They didn’t care that much about it,” Fleming says. “That’s been a huge change, and it’s been very frustrating for consumers.”

Here are the 13 documents mortgage lenders need before you can get a home loan:

W-2 forms: People who have a conventional job will need to provide W-2 forms from their employer or employers, for one or two years.

Pay stubs: Expect to provide enough pay stubs to cover a month of employment. If you’re paid weekly, for example, you’ll need the last four.

Bank statements: Lenders will want to see, at a minimum, your last two months of bank statements. Keep in mind that it’s important to provide all the pages, even if some of them are blank.

Tax returns: Most borrowers will be asked for at least the latest year’s tax return, all schedules included. If you’re self-employed, have a side business, own rental property or have a lot of employee business expenses, you’ll probably need at least two years of tax returns, both business and personal, Fleming says.

Identification: A driver’s license probably will suffice. If you don’t have a driver’s license, a passport or state-issued ID card is suitable.

Proof of legal U.S. residency if you’re not a U.S. citizen: For permanent residents, that means a green card. People who are in the U.S. on other types of visas may be asked to provide additional documentation. Lenders aren’t going to offer a loan to someone who is in the U.S. only temporarily, Fleming says.

Proof of military service: If you’re a veteran, you’ll need your DD Form 214, Certificate of Release or Discharge from Active Duty, if you want a loan from the U.S. Department of Veterans Affairs program. If your service was before 1950, the document may have another name.

K-1 and business tax returns: If you own a business or are self-employed, you will need to document all the income you claim in your loan application. Exactly what documents you need will depend upon your business structure. Fleming recently prepared a 57-page report for a client documenting the income he received from multiple ventures. Some self-employed borrowers will be asked for a profit-and-loss statement for the current year.

Sources of funds: If your submitted bank statements include any large or unusual deposits, you’ll have to verify where you received the money. “Lenders are rabid about that right now,” Fleming says. “You can’t just write a letter of explanation like you could in the old days.” If you sold stock or other assets, for example, you’ll have to provide copies of all the documents required to verify the sale and the proceeds received.

Gift letter: If someone gave you money to help with your home purchase, you’ll need to document it. “A lot of first-time homebuyers receive gifts from family members to help them,” Gutierrez says. The lender will want a gift letter that will include information about the donor’s relationship to you, the amount of the gift, the date and the purpose. The donor may be asked to prove that he or she has the resources to make the gift, probably by providing bank statements. Lenders may also have gift forms for the donor to sign.

Alimony or child support documents: A lender may not ask if you receive alimony or child support, but you are welcome to volunteer that information if you want to use those funds to qualify for the loan. You may be asked for your divorce settlement, proof that your ex is paying regularly and verification that the payments will continue for two or three more years.

Proof of reserves: Lenders want to make sure you can afford to make payments once you’ve closed, and most will want to see enough cash to cover at least three months of payments. Showing cash reserves and assets is also helpful if you have a weak job history or mediocre credit, Fleming says. “If there’s any weakness at all in the file, showing more assets is useful,” he says. “When you close escrow, we don’t want you to be broke.”

Cancelled rent checks: Buyers who don’t own another home will be asked to prove they’ve paid their rent on time, especially if they don’t have a significant credit history. That can usually be done with a verification form filled out by a landlord or 12 months of cancelled rent checks.

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