Documents Needed for the Mortgage Pre-approval Process
Reader Question: "I plan to apply for a home loan to buy a house later this year. I was told I should get pre-approved first. What kind of mortgage documents are needed for the pre-approval process? I want to get a head start on rounding these things up."
I'll get to the documents part of your question in just a moment. But first, I want to touch on the reason for pre-approval. Through this process, a mortgage lender will review your financial situation and tell you how much they are willing to lend you. It's not set in stone, and it doesn't obligate the lender into giving you that amount -- but it's still a useful step worth taking before you start looking at houses.
Getting a mortgage pre-approval before house hunting helps you in several ways. For one thing, it helps you narrow your home search by giving you a price range. Granted, you should establish your own budget before you even start talking to lenders. You should determine your own financial boundaries before applying for a loan. But the pre-approval is still helpful in that it defines the lender's boundaries for the loan.
The second way it helps you is by making sellers take you seriously. This is especially important in a seller's market. If a seller receives three competing offers, but only one of the buyers has been pre-approved, they'll probably take the pre-approved offer more seriously -- and for obvious reasons.
Would you turn down a qualified buyer for someone who hadn't even spoken to a lender yet? I wouldn't. I'd go with the buyer who had a pre-approval letter.
The Documents Needed for This Process
You can have a mortgage pre-approval done in person at the lender's office, or by fax and email. They will give you a list of financial documents they need from you. The documentation list below should only be used as a general guide. You should ask your lender exactly what they need.
Borrowers today have to provide a lot more documents than a borrower from, say, 2000 or 2003. Back then, you could qualify for a mortgage loan with very little documentation. Those were the days of "no-doc" and "low-doc" loans. But those days are long gone. Today, in the wake of the housing crisis, lenders will ask you for a long list of mortgage documents before issuing a pre-approval.
Here are the most common items requested when getting pre-approved:
- Social security number for anyone who is on the mortgage loan. This information can be verified through a Social Security card, tax documents, or anything else that shows the SSN. The lender needs this to verify your identity, and also to pull your credit.
- Proof of employment. Your mortgage lender will probably request a list of employers for the last two years (at a minimum). This document will also include each employer's name, mailing address and phone number. They want to verify your employment, because it relates to your ability to repay the loan.
- Proof of income. These mortgage documents are used to validate your income. It can come in several forms. This will be your two most recent pay stubs, or the electronic equivalent, that shows your year-to-date earnings. It's your average annual income the lender wants to know about. The lender will also use tax records to verify your earnings (see next item).
- Tax documents. This is a standard document for mortgage pre-approval. So there's a 99% chance you will have to provide tax documentation at some point. Most lenders want to see your W-2 statements and tax returns for the last two years. Among other things, your W-2s show how much money you earned over the previous year(s).
- Place of Residence. This one is self-explanatory. The lender wants to know where you've lived for the last couple of years, and maybe longer.
- Bank account information. When you apply for mortgage pre-approval, the lender will want to know how much money you have in the bank. They need to ensure you have sufficient funds for your closing costs, down payment, and cash reserves (if applicable). So they will probably ask you for account statements and balances for any checking, savings, or money market accounts. This is another standard mortgage document for pre-approval. All lenders require this.
- Credit information. Do you have other outstanding loans that you're currently repaying (car loans, student loans, etc.)? If so, the lender may ask for documents related to those accounts. They need this information to measure your debt-to-income ratio.
- Purchase agreement. Also referred to as the real estate contract. Once you have a signed contract with the seller, you'll need to give a copy to the lender. You won't have this mortgage document during the pre-approval process (the "pre" parts means you haven't found a house yet). But you'll need to provide it for the final approval, after you've made an offer on a house. This document shows the lender how much you've agreed to pay for the house. Later, they will have the property appraised to make sure it's worth the amount you've agreed to pay.
- Gift letters. Are your family members going to help you with your down payment? If so, you need to provide a gift letter along with your other mortgage documents. They need to make sure the money is truly a gift, and that your relatives don't expect any form repayment.
- Monthly expenses. Some mortgage companies will ask for an itemized list of your monthly payments. This list might include your rent, credit cards, student loans, etc.
- Self-employment documents. Do you run your own business? If so, you might have to provide some additional documents during the mortgage pre-approval process. This might include balance sheets, a profit-and-loss statement, or federal tax statements for the last two years.
Again, this is just a generic list of mortgage pre-approval documents. I came up with this list by talking to a handful of lenders about their documentation requirements. This article was published in May 2011, by the way. So it gives you a good idea of what you'll need to provide in the post-recession mortgage market.
Just be sure to ask your lender for a complete list of documents needed for pre-approval. They might require additional items not featured on this list, or they might give you a shorter list. It varies from one mortgage company to the next.