What Documents Are Needed For Mortgage Preapproval?
If you’re in the market for a home, you may have heard that you should get a preapproval before you apply for a mortgage. It can help you narrow down your search and let you know how much home you can afford. Not only that, but it can also make you a more appealing buyer to sellers.
Before you can apply for a preapproval letter, though, you need to get your affairs in order. Here are the documents needed for mortgage preapproval.
What Is A Mortgage Preapproval?
Mortgage preapproval is essentially verification from a lender that you can handle the financial responsibility of your home loan. Lenders look at various factors in your life – such as credit history, income and employment – to determine the status of your finances.
While prospective home buyers don’t necessarily need preapproval, it can give them a serious advantage. When competition is stiff and housing inventory is low, preapproval shows sellers that you are a financially reliable buyer.
That’s why it’s recommended that you obtain a preapproval before house hunting. It can help you jump on any homes that catch your eye and make you look better to sellers. However, you should only consider it if you are serious about purchasing within the next few months. Taking a pause during your search can potentially hurt your credit score.
Preapproval also puts your foot in the door for the mortgage loan process. It gives you an opportunity to talk about your loan options with your lender. That becomes a step in the right direction for the type of house-hunting budget you need and the level of mortgage payments you can handle.
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Preapproval Vs. Prequalification
You may come across the term “prequalification,” which some use interchangeably with “preapproval.” But while a preapproval and a prequalification are similar, they do have their differences.
A prequalification is typically a cheap and quick process. You may even be able to do it in less than a day over the phone or online. All you have to do is provide your lender or bank with some basic information about your finances.
This typically involves details regarding your assets, income, debt and credit score. Sometimes, the lender may also ask to pull a credit report, which helps them give a more accurate estimate. So, you get an approximate idea of the loan size you can borrow.
Ultimately, though, prequalification is only an educated guess. Preapproval is a more involved process, because your lender also verifies your assets and income. To do this, they require documents needed for a mortgage preapproval like bank statements, pay stubs, W-2s and tax returns. As a result, preapproval is more precise.
Documents Needed For Mortgage Preapproval
Documents needed for a mortgage preapproval may include various financial statements, tax returns, and more so that your lender knows the limits of your budget. It also indicates to them your reliability as a borrower.
Here are some of the documents you should prepare if you want a mortgage preapproval:
Your lender will need to verify your identity. To do that, they may ask for several pieces of personal identification, such as a driver’s license, passport, Social Security card, individual taxpayer identification number (ITIN). state-issued ID card, or federal-issued ID card. Collecting this information ensures that they are lending to the right person, which helps prevent identity theft.
Proof Of Income
The documents needed to verify your income depend on the type of work you do, how you get paid and whether you recently took a new job. This is usually easiest for salaried employees who receive a paycheck from a single source.
Preapproval documents in this case may look like:
- Pay stubs from the past month
- W-2 forms from the past 2 years
- Two most recent bank statements
- Personal tax returns from the past 2 years
- Most recent end-of-year pay stub if you include bonuses and overtime into income
However, freelancers, self-employed individuals and independent contractors don’t receive pay stubs or W-2 forms from an employer. So, they need a different range of documents, like:
- Personal and business tax returns from the past 2 years
- A profit-and-loss statement
- A copy of state or business license, if applicable
- IRS Form 4506-T, which gives the lender access to your tax records
- Asset account statements
- Additional income information, like Social Security
Landlords or owners of rental properties may also need to show documentation of current leases.
Your lender verifies your ability to keep up with mortgage payments by reviewing information like this.
Mortgage preapproval requires you to show your tax documents. It’s another layer of proof that helps certify your income level. Employees with basic income usually have W-2s or I-9s from their employers that they can present.
Meanwhile, self-employed individuals, freelancers and independent contractors will have to provide their lender with their Form 1099 and any related documentation used to report income.
In either case, you will also need to hand over your tax returns from the past 2 years along with this information.
While it’s always wise to hold on to copies of your tax returns and W-2s, not everyone may have one handy. If you need one for a mortgage preapproval, you may be able to request copies of your tax returns and tax transcripts from the IRS. If you use tax software or work with a tax professional, you can also check for copies with them.
A Credit Report
You don’t have to provide your lender with a credit report; they will pull your credit themselves. They do this with your permission to see how it affects your overall score.
Lenders use your credit report to predict what type of borrower you may be and how you juggle your current finances. If you seem to struggle with debt, like missing payments, they may reconsider lending to you.
Even still, you may want to check your credit score on your own beforehand. Borrowers generally need a minimum credit score to buy a house, usually around 620 for conventional loans.
You might not have a high credit score, though. If your score is low, you may still be able to qualify with stricter loan terms or a larger down payment. Certain loan types also have more lenient rules, such as FHA or VA loans. So, it’s essential to research your loan options before you start applying for mortgages.
Lenders use several documents to verify your income. Because of this, you may also have to come ready with bank statements from both your checking and savings accounts. Typically, lenders require statements dating back at least 2 – 3 months.
Bank statements help prove that you can afford your down payment and reveal potential red flags. For example, a bank statement can show things like bounced checks, unstable income, low funds, deposits from unknown sources and payments to other accounts.
Investment Account Statements And List Of Debts
Some people keep their funds in places outside savings and checking accounts. Individuals with alternative sources of income, such as investors, need to show proof of their income and assets, too. As a result, your lender may have to review investment account statements from 401(k)s, 403(b)s, IRAs, bonds, mutual funds and stocks, if applicable.
Since lenders want to know your available income and assets, they also need to know how much of that money goes toward debt. So, they review your debt-to-income ratio (DTI) and see if it fits within their guidelines.
Variable, monthly expenses don’t fall under your DTI, such as utilities or groceries. But other recurring, regular costs do, like:
- Car loans
- Credit cards
- Home insurance
- Homeowners association fees (HOAs)
- Medical bills
- Personal loans
- Student loans
If you have to provide records of debt payments to your lender, make sure to include pertinent information. Relevant details such as the creditor, creditor’s contact information, monthly minimum payment and total balance due are important.
The Bottom Line
A mortgage preapproval letter can give you an edge when competition is fierce for your dream home. It shows sellers that you have the finances to afford your mortgage without issue. And it also gives you a map to help you plan out your spending budget, making it a crucial first step in the home buying process.
But requirements vary from lender to lender. You can simplify the start of your mortgage loan process when you get preapproved with Rocket MortgageⓇ today.