When you apply for a loan, the bank is going to want documentation to verify that you were not lying on your application. If you tell the bank you make $10,000 per month, they will want proof of that income.
Maybe you don’t get paid bimonthly because you are a small business owner with a sole proprietorship. Or maybe you generate income another way, that is less clear than someone who works for another company with a W2.
The banks want to ensure you can pay back your loan. They also will need income records to determine how much money they are willing to loan you.
Here are 5 common documents that a bank will request of you for your home loan application.
1. W2s for the last two years-
Banks want to know that you have a steady income. W2’s are the best evidence of that. The reason why they want two years of W2s instead of one is for the same reason. Showing that you have two years of income shows that you have a record of sufficient funds to pay back the mortgage loan.
Not everyone has a W2. Some people are independent contractors, are self employed or have other methods of payment than a standard bi monthly paycheck from an institution. No problem. Your bank will just ask for other verification documents.
2. Tax Returns for the last two years-
Tax returns are also requested by the banks when you apply for a home loan. Tax returns tend to show all sources of income, not just those generated by your main job.
Your tax return shows a clear picture of all incomes generated throughout the year.
It is now common to have multiple streams of income. Lots of times people have a regular 9-5 and a “side gig” where they are self employed. Tax returns can show how both streams of income work together to paint a complete financial picture.
3. Bank Account Statements Last Two Months-
Most likely banks will ask for bank statements from the last two months.
Why do they want to see your bank statements if you already proved how much you make monthly?
Banks want to verify that you have access to cash to pay their loan back. You can’t pay for a mortgage on a credit card. You have to use cash. Likewise, investments take time to liquidate. While investments are great for your net worth and for collateral, banks do not want to solely count on them for their loan repayment.
Banks want evidence that you have that cash on a monthly basis to make that payment.
4. Pay Stubs from the last two months-
Yes, pay stubs also show evidence of income. However they also show other debts that do not show up on a credit report.
For example, child support, spousal support or employer loan paybacks do not show up on credit reports. They do show up on a pay stub.
This is another way the bank can see if you have other financial obligations that need consideration before determining loan limits or availability.
5. Other Asset Accounts- 401K, IRA, Retirement, Life Insurance Policies-
An asset is an asset. The more assets you have the more likely the bank will approve your mortgage loan. The more you have the more assurance you give the bank that you can pay them back.
Know that the bank will want to see these asset account documents and be prepared to submit them.
Are you looking at buying a home in the near future? Then it is a good idea to start rounding up these documents. Sometimes it takes a while to remember your HR Block password to retrieve the last two years' returns.
If you have everything ready, and you are ready, your pre approval process will be smooth. In this market properties are moving quickly so you’ll want a pre approval letter in hand when you’re home shopping.
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