In order to get your offer for that dream home taken seriously, you need a mortgage preapproval. This tells the seller that you are more than just a looky-loo since the lender has already looked over your financials: credit score, income level, debt-to-income ratio and job history. In a preapproval letter, the lender sets out how much of a home loan you qualify for as well as the interest rate, although it stops short of actually approving you for a loan. The preapproval letter is usually good for between 60 and 90 days.
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A mortgage preapproval letter or bank statement doesn't just come by checking a few boxes on a questionnaire. You have to apply for it after gathering and submitting all of the documentation the lender is likely to request. Make a list and check it twice as you start the process.
You won't run your own credit check, but a lender considering a preapproval application is going to want to run one. For this, you will provide your name and Social Security number. A mortgage credit check counts as a "hard" credit inquiry that can impact your credit score (as opposed to "soft" ones that don't). However, if you are asking a handful of lenders for mortgage preapproval over the course of a month or so — and you should, since it pays to shop around for a mortgage — it will count as one hard credit inquiry and not six or seven.
The credit check will yield a thumbnail sketch of your financial information, including the debts you have and your payment history as well as any bankruptcies, cards closed for nonpayment or other negative credit issues in the past seven years. The credit check will include your credit score, a critical three-digit number between 300 and 850 that reflects your credit history.
2. Your Driver's License
The mortgage lender is going to want to be sure that you are who you say you are. Otherwise, it may be granting you a mortgage preapproval letter based on someone else's credit history and salary. A state driver's license is a foundational ID document. If you don't have one, bring in a state identification card with a photo and/or a passport.
Just like your photo ID card proves your name, your Social Security card establishes your Social Security number as well as your citizenship status. The lender may not ask for the card, especially if it's a bank with which you have an established banking relationship, but dig it out because you're better safe than sorry.
4. Completed Mortgage Application
Every lender will have its own mortgage application, and it's likely that you'll need to fill it in. Most use a uniform residential loan application often called a 1003 or "ten-oh-three." A mortgage application is where you set out your personal information, like current residence, marital status, dependents, education, employment history and the loan amount and type of loan you are considering.
You will also need to list your housing costs on the mortgage application and all of your income, including salary, overtime, bonuses, commissions, dividend or interest income and other payments you regularly receive, like child support or alimony. The application will probably ask you to list your bank accounts and other assets as well as liabilities, including student loans, credit card debt and judgments against you.
5. W2s and Pay Stubs
No, the lender isn't going to take your word for that million-dollar salary you claim. If you are an employee, you'll need to back up all of the income information with W2 forms for past years (usually two years) plus pay stubs for the current year. These are both prepared by your employer for official purposes, so the lender can rely on them. Your W2 forms will show how much money an employer paid you in a year, while a pay stub is usually for a single pay period.
6. 1099 Forms If Self-Employed
More and more people are considered self-employed these days, from Uber drivers to freelance journalists. If you are not sure if you are considered self-employed, see whether the company for which you work gives you a W2 form (given to employees) or a 1099 (provided to contract workers) at the end of the year. The 1099 form is a tax form provided to the IRS and state taxing authority that sets out how much a company pays a worker in a calendar year. If you are a freelancer, contract worker or self-employed, you will receive a 1099 from each client and use these to fill out the business income schedule on your tax returns.
7. Self-Employed Profit/Loss Statements
If you are self-employed, you may also be asked to provide profit and loss statements for your business. Two years of profit/loss statements are normally required. This is obviously more appropriate for someone who actually has a business than someone who works for one company but is treated as an independent contractor rather than an employee. If you are a contract worker and don't usually prepare profit and loss statements, talk to your lender about whether these are needed in your case.
8. State and Federal Tax Returns
While politicians may be able to eschew providing copies of their tax returns, you will have to hand over yours when you are seeking a mortgage preapproval. Give the lender the prior two years of tax returns, and be sure to include all schedules and forms you file, including schedules for the self-employed if you have freelance or contract income. Not every lender will ask for state returns, but they may do so. If your state doesn't tax income — like Texas — you obviously do not need to worry about state returns.
9. Other Verification of Income
Provide documentary support for all income you claim. If you are getting alimony or child support, give the lender a copy of the divorce judgment. If you are getting regular money from a side gig, document it with business records or tax forms. If you won the lottery and are getting monthly payments, prove it to the lender.
10. Bank and Account Statements
Gather monthly statements for every one of your bank accounts, retirement accounts and investment accounts. Your lender is going to want to see your liquid assets. One reason is to ascertain whether you have sufficient cash for your down payment, closing costs and cash reserves. What about retirement accounts? Include those statements too, even if you aren't retired. These qualify as assets about which a lender will want to know since they develop a picture of your overall financial health.
11. A Gift Letter
If you are planning on using gifted money from a parent or relative as all or part of your down payment, you will need a gift letter to show the lender as well. The purpose of the gift letter is to establish conclusively that the money from your family is not a loan but truly a gift. A gift letter must state that the person or people giving the money intend it as a gift and will never demand repayment. You may also have to sign it.
Without the gift letter, the lender will treat the money as a loan, which would become part of your existing debt. One of the calculations a lender uses to assess your financial health is called the debt-to-income ratio, comparing your monthly debt payments to your total monthly income. If your debt is much more than 43 percent of your monthly income, you may not qualify for a mortgage loan.
12. A Check or Credit Card
There's a fee for everything these days, so it's no big surprise that a lender will charge you a fee for considering your mortgage preapproval application. It can cost you as much as a couple hundred dollars.
From Alaska to California, from France's Basque Country to Mexico's Pacific Coast, Teo Spengler has dug the soil, planted seeds and helped trees, flowers and veggies thrive. A professional writer and consummate gardener, Spengler has written about home and garden for Gardening Know How, San Francisco Chronicle, Gardening Guide and Go Banking Rates. She earned a BA from U.C. Santa Cruz, a law degree from U.C. Berkeley's Boalt Hall, and an MA and MFA from San Francisco State. She currently divides her life between San Francisco and southwestern France.