Buying a home is a significant but challenging investment. With property prices rising daily, many individuals rely on home loans to finance their home purchases.
But a home loan application can be a complex process that requires time and plenty of paperwork to prove eligibility. So, knowing what lenders require early enough is essential to ensure a smooth application process.
Whether you are purchasing your first home or want to refinance your existing mortgage, here are the necessary papers to apply for a home loan.
Proof of Income
One critical factor lenders consider when seeking approval for a housing loan is your financial capacity to repay the loan. As a result, most lenders will ask for proof of income.
The most common documents lenders will need to verify your income include pay stubs, W-2s, and tax returns. These documents show the summary of your earnings, deductions, bonuses, contributions, and taxes.
If you are self-employed, your lender may ask for additional documents to determine your income’s continuity and stability. This may include bank statements, profit and loss statements, and business tax returns.
Credit Report and Scores
Your credit score is a three-digit number ranging from 300 to 850, often calculated based on your credit history. Lenders use this score to determine your credit risk. Typically, higher scores indicate better creditworthiness.
A credit report will provide your lender with detailed information about your credit accounts. It will reflect any outstanding loans, credit cards, repayment history, foreclosures, or bankruptcies.
When applying for a loan, ensure you check if your credit history is accurate. You can obtain a comprehensive report about your credit from any of the major credit bureaus, including Experian, Equifax, and TransUnion.
The debt-to-income ratio (DTI) shows the amount of debt you have against your income. Lenders require your DTI information to know how well you can manage your debt and make timely mortgage payments.
When calculating your DTI, you’ll need to add all your monthly debt payments, such as car loans, credit card payments, and student loans. You’ll then divide them by your gross monthly income and multiply the resulting figure by 100 percent.
Lenders typically prefer a DTI of 43% or lower. So, borrowers with a higher DTI often experience challenges getting approved for a home loan. Fortunately, you can take several steps to improve your debt-to-income ratio, including increasing your monthly debt payments or getting a part-time job to boost your income.
If you have already found a home you wish to purchase, your lender will ask for its details. This could include the property type, address, market value, property tax information, and more.
Property information is necessary to determine the loan-to-value ratio (LTV), which is the loan’s value compared to the estimated property value.
Lenders prefer a lower LTV because it shows that the borrower has more equity in the property, hence less likely to default on the loan.
Besides the property value, lenders may also require a comprehensive home inspection report. This will help them identify any potential problems, such as structural issues, that may affect the property’s value in the future.
Providing proper identification is vital to making your home loan application successful. Lenders may request several identification documents, including your driver’s license, state-issued ID card, or passport.
It is essential to ensure your identification is up-to-date, as lenders reject an expired ID. If you use digital copies of your IDs, make sure the files are high-quality and easy to read.
Additionally, when providing your identification information to lending institutions, be sure to do it securely. Avoid sending sensitive data, like your Social Security number or bank account information, via email or other unsecured channels.