Buying a home can be a complicated process, especially if you have never done it before. If you are in the market for your first home, you might want to get prequalified for a mortgage before you start shopping.
Even if you’re buying the home as a potential rental property and already found a property manager with great reviews and help to show the bank you’ll be collecting income to offset the mortgage, it doesn’t matter. You still have to prequalify based on your real current income.
Home sellers love prequalified buyers, and they know that prequalification can streamline the buying process and reduce the risk that a pending sale will fall through at the last minute. If you want to get the home you want, here is what you will need to get that prequalification letter.
Income Verification Documents
To get a prequalification letter, you will need to provide extensive information on your income. If you have more than one source of income, you should be prepared to prove it all, so think about how you earn money and which types of documentation you will need.
The exact forms of income verification documents you will need depend largely on the sources of income. Some of the most common ways potential homeowners will be asked to prove their income are:
- Pay stubs – If you work for a traditional employer, you will want to bring along your most recent pay stub. Having a recent pay stub is especially important if you have recently received a raise or promotion, as the increased amount may not be reflected on your W2 form.
- W2 forms – Your employer must provide a W2 earnings statement at the beginning of every year, and you should be sure to keep it handy during the prequalification process. The W2 will serve as an earning statement, proving how much money you made at your job during the previous year. If you have more than one W2 form, you should bring along at least five years’ worth – it’s better to have too much documentation than too little.
- Tax returns – Potential lenders will want to see an overview of your income, and there is no better document for providing it than your most recent set of tax returns. You should bring several years’ worth of tax returns to your prequalification meeting — it never hurts to be over-prepared for such an important event.
- 1099 forms – There are several different kinds of 1099 forms, and all of them are important when verifying your income and prequalifying for a mortgage. You can use 1099 forms to show income received from dividends, interest, and self-employment, for example.
- Alimony and child support – If you receive alimony or child support from an ex-spouse, you should be prepared with documentation of the amounts and frequency of the payments. Be sure to bring any proof you have, including bank statements, canceled checks, and anything else that proves the amount you are claiming.
- Any other income documents – If you have additional sources of income not covered by these documents, be sure to bring proof of those money receipts as well. This additional income might include rents from investment properties, payments from freelance clients not shown elsewhere, and anything else you think might be relevant.
It’s important that the lender feels comfortable enough to grant you a prequalification letter for the mortgage, and the more documentation you can provide, the better. Being prepared is even more critical if you are self-employed or rely on freelance income, as those monetary sources can often be unsteady and unpredictable.
Information on Your Assets
Potential lenders will need to see documentation of your current income, but they will also likely ask about your assets. Having accumulated assets in your name will make you less of a credit risk, which could be good news for your prequalification chances.
Everyone will have a different set of assets, and no two balance sheets will be the same. Even so, these are the standard documents you can expect to be asked for at your prequalification meeting.
- Bank statements – Buying a house is expensive, and the costs go far beyond the monthly mortgage. The lender will want to know you have ample free cash available for unexpected repairs and other unforeseen events.
- Brokerage statements – If you have money invested in the stock market, be sure to bring those brokerage statements with you. The stock market is notoriously volatile, so bring several months’ worth of brokerage statements to your meeting.
- Information on mutual funds and other investments – Providing documentation of your assets is important, as is having a complete financial picture available. If you have other types of investments, bring those statements with you to the meeting.
It is important to have full documentation of not only your income but your assets as well. The more information you can provide to a potential letter, the better the chances you will walk out of the meeting with a prequalification letter.
Documentation of Your Debts
If you want to walk away with a prequalification letter, you will need to provide extensive documentation of how much you earn and how much you own, but that is not the only kind of information lenders will be interested in. A potential lender will be just as interested in how much you owe as they are in how much you own.
Providing documentation of your current debts is important since every dollar applied to debt service and interest is one less dollar you will have to pay the mortgage. If you have outstanding debt, bring these documents to the prequalification meeting:
- Student loan payment forms – If you are currently paying off student loans, bring documentation of the amount you owe and the monthly payment. It is important to document your student loan debt even if repayment is currently on hold.
- Credit card bills – Potential lenders will be especially interested in any credit card debt you have. The high-interest rates on most credit cards can make repayment especially difficult, and it’s important to provide potential lenders with a full financial picture. Bring several months’ worth of statements to the prequalification meeting, which will help show that you are steadily paying down the outstanding balances.
- Information on other forms of real-estate debt – If the home you are looking at will be your first real-estate holding, you do not need to worry about this, but if you have rental property, you will want to document what you owe and how much you are paying.
Documenting both what you own and what you owe is important, and the more information you can provide, the better. In addition to the documents listed above, you could benefit from other forms of information as well.
If, for instance, someone is helping with the down payment, a letter stating that could bolster your case and help you qualify for the loan you are seeking. Renters should bring along their rent receipts, as a history of on-time rent payments can often reassure a skittish lender.
Walking into the negotiations with a prequalification letter can improve your negotiating power and help your offer get noticed. If you want to get that letter, it pays to be prepared, so start gathering up your documents and be ready to go when the real-estate agent calls.
