Searching for a new home can be a complex process. When you finally find the house you want to buy, you may have to figure out how to finance it. If you’re like most buyers, you’re not going to be paying for your house in one lump sum of cash but will need to find a mortgage. Once you have a lender you want to work with, you’ll need to submit several documents for your application. Here are the most important pieces of information you’ll need to provide to a lender.
Required Documents for a Loan Application
When applying for any type of loan, certain documents are required to prove your identity, work history, credit history, and other essential aspects that help a lender approve your loan. If you gather these documents prior to visiting with the lender you plan to use work with, it could save you a lot of time. These documents include:
- A driver’s license or state ID card. A photo ID is required to verify that you are who you say you are.
- Two years of tax returns. Lenders will want to see your tax returns over the past two years to note any changes over time.
- W-2s from the past two years. Even though this may seem redundant because your taxes are based on your W-2s, lenders will want to see these to know your income in recent years.
- Recent pay stubs. Pay stubs show what your current income is and that you’re currently employed.
- 1099 forms and profit and loss statements for self-employed individuals. Lenders will be looking at your income and trends in your self-employment history.
- Bank account statements. Banks accounts allow lenders to verify the amount you have in checking and savings accounts.
- Investments. If you have stocks or bonds, you’ll need to provide your account statements.
- Assets. Other significant assets, such as vacation homes or investment properties, will need to be documented.
Other important information that may apply to your situation includes information regarding a divorce, including divorce decrees, alimony, and child support. If a friend or family member is gifting you money towards the down payment, you’ll need proof that this is a gift and not a loan. Retired persons will need to submit proof of social security or disability income and any retirement statements that pertain to you.
If you’ve had significant credit fluctuations, including any detrimental marks on your credit, you can write a letter of explanation to be included with your mortgage application. For your first time buying a house, you’ll also need to show your rental history, either through a year of canceled rent checks or a letter by your landlord stating the term of your lease and your payment history for the duration of your rental.
Other Factors Affecting Loan Applications
Lenders look at other factors to determine your creditworthiness and whether you’re a high-risk borrower. The main thing that lenders are looking for in a borrower is the ability to afford the repayment of their mortgage loan. Here are some steps you can take in advance of your application, to help the process go smoothly.
Determine Your Budget
Know the budget you’re working with before applying. You’ll need to know what amount you can afford to borrow. Lenders will be investigating your debt-to-income ratio (DTI), which is the percentage of your income that goes toward paying your debts off, as well as another monthly spending that cuts into your income. The ideal debt-to-income ratio lenders are looking for is that less than 28% of your income should need to repay your mortgage. Additionally, your monthly mortgage payments combined with other debt repayments, such as credit cards, should be less than 43% of your income. These are industry rules of thumb and do not apply to all cases.
Improve Your DTI Ratio
The best way to improve your DTI is by reducing your monthly debt payments. Paying down revolving debts like credit cards will positively impact your DTI because it will directly reduce the minimum payments you are required to make each month. If reducing your debt is not possible, try to increase your income. Whether you apply for a raise at your current job, work more hours, or take on a second job or a side business of your own, more income means lenders will look upon your application more favorably.
Save for a Down Payment
If increasing your income isn’t possible, and you don’t have any debts to pay down, the best way to increase your probability of loan approval is to accumulate a greater sum of money for your down payment. The larger the down payment you can afford to make, the smaller your mortgage loan will need to be, making your application more attractive to a potential lender. If you can make a 20% down payment, you’ll also reap other rewards, such as not needing mortgage insurance, which will lower your monthly mortgage payments.
Boost Your Credit Score
Another way you can increase your appeal to lenders is through having a high credit score. If your credit score leaves something to be desired, you can work on boosting it. Paying off your debts as soon as possible and paying bills on time is one way to raise your credit score. Keeping old accounts active and in good standing is another way to boost your score. Finally, don’t open new credit accounts if you can help it. Applying for new credit cards often lowers your credit score through hard inquiries.
Explore Your Loan Options With Cascade
Before applying for a loan, it’s wise to research the different types of loans available. For example, it’s important to know the difference between an FHA (Federal Housing Authority), and a VA (Veteran’s Administration) home loan if you’re a qualifying veteran. It’s important to investigate any state programs that provide special assistance for first-time homebuyers. This is also where working with a knowledgeable lender like Cascade is highly beneficial, as we will alert you to other loan options and special programs.
The process of applying for a mortgage may be daunting, but you can make your application go smoother with these advanced preparations. Getting all your documents in order before applying will help you feel less frazzled than if you’re scrambling to get them together during the loan application. If you’re unsure what you’ll need, reach out to Cascade, and a knowledgeable member of our team will be happy to answer any questions you may have. Cascade offers several options for manufactured and modular home loans.