Before approving a home mortgage, lenders will pay particular attention to three major items, your credit, income and assets.
Credit — In a mortgage lender’s eyes, the higher your credit score, the lower your risk, and the more likely you will pay your mortgage debt on time. Your credit report provides a window into your monthly debt obligations and shows how you pay each month, whether in a timely manner or with frequent delays. Your credit report will also show if your credit obligations are manageable or bordering on excessive.
Get your credit report in order and know your credit scores from the three major credit reporting companies: Equifax, Transunion and Experian. Check the reports for possible errors. If your credit is less than perfect, find a good credit repair company for advice on what accounts to keep open, pay off, close and how to correct any errors on your report to increase your credit score. Most lender programs require an average minimum credit score of 640.
Income — Income plays a large role in determining the amount of the mortgage loan you will be able to obtain. All income must be provable for the most current two years … if you can’t show it, the lender can’t use it. For most of us, paid on an hourly rate or salary, income can easily be proven with pay stubs, federal tax returns, W-2’s and award letters for Social Security or pension income.
However, if you are self-employed or receive commission income, you may be required to provide a business federal tax return, year-to-date profit-and-loss statements and balance sheets. Your income after expenses may be averaged for the most recent two years. Rental income will require documentation through leases, schedule E of your federal tax return and even proof of deposits of rental income. Most lender programs will limit your debt-to-income ratio, including mortgage expenses, to 45 percent of income.
Assets — While some lending programs require little or no money down, generally some costs must be paid when purchasing a home. Lenders will require proof of assets, such as copies of statements for checking and savings bank accounts, 401K or IRA statements, and statements for investment accounts (stocks, bonds, mutual funds, etc).
Review your bank statements; you will be asked to explain and source any large deposits. Lenders will require all pages of your statements for the most current two months for all your accounts. Some lender programs will require reserve funds left over after all mortgage fees are paid. If relatives will be providing a "gift" of funds to assist with purchase of a home, they must sign a gift letter and show proof of available assets to donate.
So, in getting prepared, checking your credit, keeping copies of pay stubs and tax records, as well as all pages of bank statements, will be beneficial when applying for pre-approval of a mortgage.
