If 2017 is the year you’re ready to buy your first home, you’ll need to know what’s necessary to get there. Bookmarking your favorite listings and visiting their open houses is the fun part, but firstly it’s important to make sure you understand the non-negotiables of the home buying process. After all, you can’t just charge your home to your AMEX card. If your sale isn’t a cash one, your mortgage lender will want to check your financial background to size up whether you can afford the place you’re eyeing. That means you’ll have to round up some paperwork as proof.
But just what do you need to provide–and how much of it is necessary? While that can vary from lending institution to lending institution, these three forms of proof are vital to ensuring your homeownership goals:
To ensure you have the income history to buy a home, most lenders will ask for two years of tax returns, two years of W-2s, or both. This is definitely the case for freelancers and self-employed borrowers, but full-time employees may be asked for all of this paperwork as well. Your lender may even retrieve your tax returns themselves straight from the IRS (with your written permission, of course), since this cuts down on potential fraud. Still, it’s a good idea to have those documents in order just in case.
Tax returns won’t be where your proof of income ends. You will also need to rustle up copies of your past two months of pay stubs. If you’re self-employed or freelancing, things get a bit more complicated. If you’re a contract employee with a 1099 you probably file a Schedule C on your personal return. If that’s the case, most lending institutions will take a two-year average of your listed income. You may also be asked to show a projected balance sheet, detailing what you’ve earned this year and what you plan to earn in the coming months. Consistency is key!
You will also need to show two months of asset statements— (think your checking and savings accounts). This one is a biggie because your lender will use these statements to prove you have enough money available to buy a home and then some. You will need liquid funds available for the down payment and to cover closing costs. You will also need reserves after closing, which means you can’t be left with $0 once you buy the home. While the reserve amounts vary, two to four months of reserves is usually enough for most conventional loans.
Once you’ve got all your ducks in a row in the paperwork department, you’re on your way to pre-approval for a mortgage. And as the age old saying goes, “pre-approval is the most important step.”
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