What documents will I need when applying for a mortgage and why do you need them?
YOUR INCOME AND EMPLOYMENT HISTORY Step number one is to find the most recent pay stubs and the last two year’s W-2 and tax returns for each person on the loan application. This basic information speaks to your job stability and gives insight to your lender about whether you’ll be able to make monthly mortgage payments.
YOUR DEBT AND MONTHLY EXPENSES When applying for a mortgage, list any outstanding loans you’re currently repaying – including all auto loans, mortgages, student loans, credit cards, and child support or alimony payments. Be sure to include the creditor’s name, address, account numbers, minimum monthly payments and current account balances. Lenders will use this information to determine your debt-to-income ratio, or the percentage of your monthly income that’s spent on paying your debt.
WHERE YOU’VE LIVED One of the easiest to find documents you need when applying for a mortgage is a list of where you’ve lived for the past two years, including landlord names and addresses if you don’t already own a home.
YOUR ASSETS Lenders need to see your bank account statements for all checking, savings and money market accounts, homes or properties you currently own (including the lender’s information, account number, monthly payment and what you owe on the loan), and other asset statements like stocks and bonds, IRAs, CDs or any other securities that could be used for a down payment. You should also provide pension, social security or disability payments if applicable, dividend earnings, and bonuses. They’re required to verify that you have the necessary funds in place for closing costs, down payment, and cash reserves (if required) for the loan you’re trying to obtain.
GOOD TO KNOW Even with these documents ready, your lender may ask for other supporting information. It’s common for loan officers to need additional documentation as they work through your loan application. And if you own your own business or work contract or freelance, you’ll also need 1099 forms and profit and loss statements for at least two years. The very best thing you can do when applying for a loan is to avoid making big changes or taking more cash out of your accounts than usual.
What are closing costs?
Closing costs include items like appraisal fees, title insurance fees, attorney fees, pre-paid interest and documentation fees. These items are usually different for each customer due to differences in the type of mortgage, the property location and other factors. You will receive a loan estimate of your closing costs in advance of your closing date for your review.
What is PMI?
Also known as Private Mortgage Insurance, PMI is a monthly insurance premium charged on conventional mortgage loans in which the buyer put down a down payment of less than 20% of the cost of the home. PMI is the lenders' protection in the event that you default on your primary mortgage and the home ends up going into foreclosure. These premiums can be removed once you’ve paid off 20% of your loan, including interest.
What is the difference between fixed rate and an adjustable rate mortgage?
The basic difference is that with a fixed rate mortgage, the interest rate on the home loan will not change over the entire life of the loan. This allows the borrower to accurately predict their future payments.
With an adjustable rate mortgage, the interest rate if locked in for a specific time period but can fluctuate annually, depending on the federal prime rate, after the locked period expires. The fluctuating interest rate can increase or decrease the amount of your monthly payment.
What is a DTI?
Also known as your Debt-to-Income ratio, your DTI is the ratio of monthly liabilities and housing expense divided by the monthly gross income of the borrower(s). Lenders use your DTI to determine your ability to manage the monthly payments of your home, as well as any other debts you may have.
Are there advantages to purchasing a home?
BUYING A HOME IS A GOOD INVESTMENT Rental costs are creeping up. And, while home prices are also increasing, when you stay long enough, the value of your property will traditionally go up as well. When you are ready to move, you’re likely to get a substantial return on your investment. Because interest rates are currently low, now is a good time to consider taking the plunge. Click here for information about projected rising interest rates.
OWNING A HOME STABILIZES YOUR BUDGET When you’re a renter, there are many things out of your control. Landlords can (and do) raise rents. In most cases, you can’t guarantee your rent will remain stable for the long term. Owning a home, however, means you know your mortgage payment – on a fixed rate term of up to 30 years – and can plan accordingly. And, bonus: after you pay off your mortgage the home is yours!
THE TAX BENEFITS ARE REAL Have you heard of mortgage interest? In the early years of your mortgage, interest is often a large part of your mortgage payment each month. Deducting the amount of your mortgage interest payments from your taxes is the chief tax benefit of owning a home. And, if you itemize your deductions, you can also deduct property tax payments and other expenses from your federal income tax.
YOUR NEST EGG CONTINUES TO GROW Every time you make a mortgage payment, you’re one step closer to paying off your loan while building equity at the same time. What’s more, as your home increases in value, so does the amount of equity you have at your disposal. When necessary, you may be able to borrow against that value – to make home improvements or for unexpected medical or education expenses. This type of home equity line generally offers lower interest rates than a credit card and can be used to pay off high-interest credit card debts.
What is a home appraisal?
An appraisal is an unbiased professional opinion of a home's value in the fair market. Appraisals are needed to ensure the homebuyer, the home seller and the mortgage lender receive the accurate and true value of the real estate in question. Appraisers will typically look at the following to determine the value of the home:
- Lot size, view, curb appeal, etc.
- Value-adding features, upgrades or additions
- Quality of construction, structural integrity and overall condition of the property
- Recent comparable sales (otherwise known as comps) in the area
- Anything that might add or subtract value