When submitting a loan application to buy and finance a home or to get a preapproval letter before shopping for one, the lenders review your application and supporting documents. There are multiple things lenders need to review but among the most important are your income and employment, your credit history and credit scores and your assets. Income and employment are verified in two ways- one way if you’re self-employed and another slightly different way if you work for an employer. Self-employed borrowers will be asked to provide their last two years of income tax returns both personal and business as well as a year-to-date profit and loss statement. If you’re not self-employed you’ll be providing your last two years of W2 forms along with your most recent pay check stubs covering a 30 day period. Lenders want to make sure the new mortgage payment is affordable and you have the ability to repay the new mortgage along with other monthly credit obligations.
And then there are your assets. The assets that lenders care about are those being used to buy and finance the home. First, the lender needs to make sure there are enough funds available for a down payment and closing costs. Your loan officer will provide you with a loan cost estimate which will itemize the various closing costs you might encounter at your settlement.
There will also need to be a certain amount of cash available after the transaction has closed, these amounts are referred to as “cash reserves” and are tabulated as the number of months of mortgage payments in a liquid account. If the new mortgage payment, including taxes and insurance, is $2,000 and the loan program asks for six months of cash reserves, you’ll need to show you have $12,000 available in addition to the funds needed for your down payment and closing costs.
Lenders also look at your bank statements to make sure the funds belong to you. Your name will need to appear on the statements. If there is another name on the statements, that person must provide, in writing, permission for you to access all the funds in the account if that person is not buying the home with you. Otherwise, you’ll be attributed 50 percent of the total, not the entire amount.
Finally, lenders want to verify the deposits on the account are coming from a legitimate source. Most often there will be deposits on the 1st and 15th for example. Your lender can match these deposits up with your pay check stubs. If self-employed, the profit and loss statement should show a similar amount of deposits reflected as income and deposited in an account. If there are any deposits that cannot be sourced, those funds may not be counted toward available cash to close.