What Are the Documents Needed for a Mortgage Preapproval?
If you’ve already started looking around for a new house to purchase, you might’ve noticed that competition for homes can be fierce. That’s especially true if you’re house-hunting in a seller’s market where it can feel like homes barely make it up for sale before intrepid buyers make offers and get those desirable properties under contract. If your home search is taking place in one of these in-demand markets — and even if it’s not — you want to increase your chances of being able to act quickly and make an offer on a property you love. While it isn’t a requirement to do so, getting a mortgage preapproval can strengthen your offer and streamline the process of purchasing your new home.
To help you sort through the process, we’ve rounded up the basics about preapprovals, including the various documentation you’ll need to provide to a lender for them to get the details they need about your financial situation and efficiently process your application. From income statements to alimony payments and retirement income, learn more about what you need in order to prepare for a mortgage preapproval.
Why Should You Get a Mortgage Preapproval?
Although you might’ve heard both used interchangeably, a preapproval letter from a lender is different than a pre-qualification. Getting a preapproval is a much more thorough process that involves filling out a mortgage application, among other things. According to Bank of America, a preapproval is “an offer (but not a commitment) to lend you a specific amount” of money, so it lets you know exactly how much you can borrow and put towards the purchase of a home.
A preapproval is a much stronger piece of paper. The primary goal in getting one is to be able to demonstrate to potential sellers that your finances back up your offer and that you’re a secure choice as a buyer. While you can get preapproved for a mortgage online, a preapproval letter comes from a lender who’s taken the time to examine key details of your financial situation, effectively vetting you.
Mortgage preapprovals show the seller that your income, your employment and your assets have all been verified. If the seller considers your offer, they’ll potentially feel more comfortable knowing that you’ve demonstrated an ability to afford the home. If the seller receives multiple offers, their real estate agent will likely follow up by asking who’s preapproved — a factor that can help the seller choose the strongest buyer.
During the preapproval process, your lender will ask you for several documents and pieces of information. These documents should be relatively easy to access, and you might even be able to download some of them online. The preapproval process is smoother when you have these documents prepared beforehand so that, when the lender needs to check them, you won’t have to go on a time-consuming search or risk forgetting something because you’re hurrying.
Employment and Income Verification Documents
Your lender will typically begin with a few basic questions about your identity and financial situation. First, the lender will need your Social Security number to verify your identity and run a credit check on you. They’ll also want to know about your employment and will ask if you’re retired, a W-2 salaried or hourly employee, or a self-employed or freelance worker who receives 1099 forms for tax purposes. This helps them determine which documents they need to collect from you and how they’ll verify your income.
Lenders want to know how you receive the money that you’ll be using to make the payments on your mortgage, so they’ll typically want to see your state and federal tax returns from the two previous years. To verify your income, you’ll need to provide W-2 forms, two recent pay stubs and documentation of bonuses. They may also ask for end-of-year pay statements.
If you’re self-employed, a freelance worker or an independent contractor, there are a few additional requirements because you won’t have W-2 forms or pay stubs from an employer even though you’ll still be able to provide tax returns. You’ll typically need to show a current profit and loss statement as well as two years’ worth of income records. This can include 1099 forms you received or additional income statements you used when you filed your taxes. If you’re receiving Social Security, retirement pension, alimony or child support payments, provide records of this income, too.
If you have any real estate income that qualifies, such as income you earn from a rental, you’ll also need to provide this documentation. Give your lender a copy of the lease, proof of payments and the address so that they can determine the current market value of the property. The rent you receive should count as income as long as you’ve been receiving it for at least a year.
Proof of Your Assets
In addition to your income, you’ll also need to verify your assets. To start, you’ll want to provide a copy of two months’ worth of bank statements — or more, depending on what your lender asks for. It’s important to do this for each of your bank accounts. For example, if you have a savings and checking account at one bank, a savings account at another bank and a savings account at a third bank, you should provide the lender with statements for each account.
Depending on the other assets you have, you’ll also need two months of retirement statements for IRA accounts, investment accounts and certificates of deposit. This involves compiling information about stocks, bonds and 401(k) statements showing your vested account balances. Make sure to include all pages on the statements, even if they’re blank.
Records of All Your Debts and Other Payments
To get the most accurate picture of your financial situation, your lender will also need to look at all of the debts you currently carry so they can determine your debt-to-income ratio. Try to include as much detail as possible; provide information about any student loans you may have, additional mortgages, credit cards debt and even car loans. Your credit report may also contain much of this information, including balances and current standings for various accounts that get reported to the credit bureaus.
A home you own is also considered debt. If your current home is under contract or on the market, you may be preapproved with a contingency. This means the lender will preapprove you for a new mortgage, pending the sale of your current home.
When you’re looking into your debt, you may want to take some time to test out an online mortgage pre-approval calculator. These help you get an idea of what you’ll qualify for so you can make sure the monthly payments fit within your budget and are affordable overall.
Additional Paperwork to Complete the Process
Depending on the lender you’re working with, you may be required to submit other important documentation. First, if you’re renting an apartment, you may need to show your payment history for the past two years. You may also need to provide your landlord’s contact details and your apartment information to the lender.
If you’ve recently gotten divorced, the lender may ask for a copy of your divorce decree. You’ll also need to show any alimony or child support payments you make. If you’re receiving gifted money to cover a portion of your down payment, the lender may require that you back it up with a written letter or copy of the check so that your lender can verify the source of the gift.
If you’re retired, a veteran, applying for a USDA loan or a first-time homebuyer, you’ll also want to discuss this with your lender. There are several different loan options available and your preapproval process may be smoother if you determine this ahead of time.
Down Payment Information to Keep in Mind
In addition to your documentation, your lender will also need to know how much you’ll be paying as a down payment. Your down payment helps determine your loan amount, along with the type of loan you qualify for. You may qualify for a first-time homebuyer program, an FHA loan or a jumbo loan, depending on your situation.
Your down payment also determines the amount you qualify for and your interest rate on the loan. This information appears on your offer letter when you make an offer on a property. An offer with a 20% down payment and a preapproval letter is much stronger than one with no preapproval and a 5% down payment.
Use These Tips for Preapproval
To qualify for a mortgage, there are a few easy tips to follow and steps to take ahead of time. First, start by making a budget so you have an idea of what you can afford — and what you can cut down on to free up some extra money to put toward your down payment. Next, obtain a free copy of your credit reports here. From these, you’ll learn what your score is and can see if there are any errors to clear up or areas to work on.
Try and save as much as possible to pay down your debts and contribute more money toward your down payment. The lower your debt-to-income ratio is, the better. If you have a larger down payment or cash reserve, this can boost your chances of qualifying for more favorable loan terms. The more you do before you apply, the smoother the process will be.
