Mortgage Application Basics – What You Need to Know
Buying a house is one of the biggest decisions you will make in your life. This is a huge financial responsibility which is why lenders will require a lot of information before you get approved for a mortgage. Here are some mortgage application basics that you need to know:
First and foremost, before applying for a mortgage you should have a bunch of documents you will submit along with your application. This is often a tedious task but you need to get it right in order to get approved.
- Proof of income – you need to present the previous year’s W-2 form, your most recent pay stub and your tax returns from the past year. Depending on your financial situation, additional paperwork may be required.
- Earnings outside of a regular job – if you are making money from sources other than your job, you need to provide detailed documentation on these. For example, if you are divorced and receive child support or if you have rental properties, you need to show it to the lender.
- Debts – your debt-to-income ratio is very important for determining your mortgage rate, so you need to provide list of all debts you have, including credit cards, student loans, car loans, alimony and child support payments, along with a breakdown of balances and the minimum monthly payments.
- Assets- you need to present an inventory of assets including bank statements, investment records, retirement accounts, real estate, auto titles and any other investments you have.
You need to have money saved for a down payment and closing costs. Lenders want to see that the money for the down payment comes from your own account. This proves that you have enough savings and can cover unexpected expenses after buying the house. If you received money towards the down payment as a gift, you may be required to provide documentation that declares it was a gift and not a loan.
You need to know your personal finances well and budget for the house you want to buy. Before even starting the application process, you need to research home prices and decide which one will fit your budget. Factor in all additional expenses and see if you can afford this monthly payment. Your mortgage payment should not exceed 30% of your income.
Getting preapproved for a mortgage gives you a competitive advantage on the market. Sellers are more likely to pick your offer. You need to present the documents as if you are applying for a real mortgage. When this is done you will get a preapproval letter from the bank. It will also give you a better idea of which homes you can afford.