Getting pre-approved for a mortgage is an excellent way to begin your househunting journey. Although it may not be required, you’ll be more successful buying a home with a mortgage pre-qualification, especially in a competitive homebuying environment.
A pre-approval letter proves to sellers that you’re a legitimate buyer with the finances to purchase the home. Moreover, you can narrow your search because the pre-approval lets you know the price range of the property you can afford.
Required Documents for a Mortgage Pre-Approval Letter
The documents you’ll need for a pre-approval letter contain information about your financial position. But other documents may also be required depending on your job, the loan you’re applying for, and the type of property you wish to purchase.
Below is a checklist of the documents for a mortgage pre-approval letter.
The lender needs proof of your identity, so you’ll have to provide any valid, state- and federal-issued identification card with a photo, such as:
- Driver’s license.
- Individual taxpayer identification number (ITIN).
- Social Security card.
This requirement ensures you are who you say you are and prevents identity theft.
Proof of Income
These documents are needed to verify your income source and job type. They also provide information on your length of employment and how you’re getting paid. These documents include the following:
- Recent pay stubs.
- W-2 forms (previous two years).
- Latest bank statements from each bank you’ve used.
- Personal tax returns (previous two years).
- Latest end-of-year pay stub, if you’ve included overtime pay and bonuses into income.
For self-employed, freelancers, or independent contractors who don’t get W-2 forms or pay stubs from employers, they’d have to submit the following:
- Profit and loss statement.
- If applicable, a copy of the business or state license.
- Internal Revenue Service (IRS) Form 4506-T for tax records.
- Asset account statements.
- Other documents showing your income information, such as Social Security.
- For owners or landowners of rental properties, documentation for ongoing leases, current market and lease value of the properties, rental income, and addresses.
- Form 1099.
The lender will need the information provided by these documents. You can also request copies of your tax transcripts and tax returns from the IRS if necessary. If a tax professional helps you, you can also get a copy from them.
Investment Account Statements
Since you may have other sources of income, you’ll have to show your lender other assets and income and where you keep them. Lenders will require an applicant’s investment account statements for review. You’ll need to provide them with statements from:
- Stocks, bonds, and mutual funds.
Get at least two months of statements from your IRA, stocks, bonds, and certificates of deposit (CDs). And the latest quarterly statement from your 401(k) as well.
List of Debts
Lenders also need information about how much of your income goes toward debt payments. They’ll check your debt-to-income (DTI) ratio and review your debt situation. Monthly expenses, like utilities, groceries, and others, are variable. These expenses don’t fall under DTI. Other regular and recurring costs do, such as the following:
- Credit cards.
- Medical bills.
- Car loans.
- Homeowners Association (HOAs) fees.
- Personal loans.
- Student loans.
- Rent or mortgage.
You should also include relevant information like monthly minimum payment, balance due, creditor, and contact information.
References from Landlord/Rental Information
Lenders will want to know whether your payments are on time if you pay a monthly mortgage. Likewise, if you rent, you must show that your rent payments are prompt and up-to-date. Lenders will also want your previous landlords’ contact information. Finally, they’ll want to check if you’ve kept up with your responsibilities as a renter.
Certain gifts should also be included, for instance, if someone close to you gives you money substantial enough to be used as a down payment. You’ll have to prove that the money isn’t a loan you’ll have to repay. If it is, the loan must be added to your debts.
There are rules about certain gifts and from whom you can receive them. Many lenders, for instance, will only consider money from family members as gifts. On the other hand, Federal Housing Authority (FHA) loans permit donations from family members, first-time home buyer programs, labor unions, and employers.
You’ll need to submit a gift letter to prove that the gifts you’ve received are indeed gifts and not loans. Gift letters assure the lender that the funds you’ve received aren’t loans but gifts. The person from whom the gift came must write the gift letter.
Typically, a gift letter includes the following:
- Donor’s personal information, like name, nature of the relationship to the recipient, and contact information.
- Name and contact details of the recipient.
- Amount of the gift.
- Date when the gift was received.
- How the recipient used or will use the gift.
- Confirmation that the gift isn’t a loan and does not need to be repaid.
- Both the recipient’s and donor’s signatures.
Although not required, homebuyers need a mortgage pre-approval letter to show sellers they have the finances to purchase the home. So in almost all instances, effectively searching for a home to purchase requires the buyer to have a mortgage pre-approval letter.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.