Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
7 Legal Documents You Need When Buying a House
House-hunting is a thrilling exercise that is only really dampened by the amount of paper-pushing you need to do to buy a house. You’ll talk to lots of real estate agents and loan officers who will have a lot of demands.
Let’s face it. Nobody is a big fan of paperwork.
On the bright side, you don’t have to do all the legwork yourself. If you’re buying a house and planning on taking out a loan, you can get the help of a mortgage broker. Maybe you don’t want to deal with studying up on property taxes and closing costs. Your mortgage broker will act as a middle man between you and the mortgage lender and take care of all the necessary trips to the bank. If you don’t mind the additional cost for this service, it’s better to entrust the mortgage process to someone who knows all the ropes.
However, you will still be asked to sign a lot of documents and submit the necessary information. Even if you already have a broker, you will still have to talk to a real estate agent as you shop around for a house.
Let’s look at some of the requirements that a real estate agent, a mortgage broker, or a lender will ask.
What paperwork is needed to buy a house?
Different mortgage types and different mortgage lenders call for varying requirements for your application. But there are typical demands that are to be expected no matter which lender and what kind of home loan you will be using.
Trust us. Before you dive into the loan application process, a nice accordion-style folder is going to save you a lot of time and effort.
1 – Tax returns
It would be best if you had started documenting your federal income tax returns the day you started officially paying taxes. You never know when you will need to talk to a loan officer at a bank for an emergency or necessary purchase. If you haven’t, though, do not panic just yet. When applying for a mortgage, the lender will usually need just up to two years’ worth of these documents.
The most crucial reason why banks ask for them is for income verification. They want to see if your business is earning profit or if there is stable demand for your services. It shows them how consistent and dependable your income is, especially if you work on commission or declare that you are self-employed. If you have two years of taxes, they’ll be able to see how often your income fluctuates, if at all, and whether there are any concerning gaps in your employment.
If you are employed at a company, you can show the mortgage lender your W-2 forms for the last two years instead of tax returns. So if you are a salaried worker, it’s a little easier to prove that you have a steady stream of income.
Once the lender takes a look at your taxes or W-2s, they can also predict your income’s potential for growth. If your salary is gradually increasing, this is a good sign that you’re capable of getting a mortgage. If it has been heading in the other direction, lenders will generally want to minimize their risk by not approving you for a loan.
Tax returns and W-2s are also of interest for lenders because they ensure that you are not a risk for mortgage fraud. These days, you can come across lenders who won’t ask for your tax returns, but these are usually lenders who put a high interest rate on your mortgage. So if you want to save money on your mortgage, you’ll want a lender who makes an effort to verify your income.
2 – Pay stubs
If the lender is already going to determine how much money you make via your tax returns, why do they still need to see your pay stubs?
Firstly, your pay stubs are more immediate, and you will be asked to provide the most recent. A minimum of two months’ worth of pay stubs will be the basic requirement.
Pay stubs are necessary to your application because the lender uses them to compute just how much money you should be qualified to borrow. Your two months of pay stubs assure the lender that you are employed. In addition, these will provide an accurate picture of how much you are earning at present.
Say, for example, that you are unemployed or on unpaid leave. The lender will then ask for a written explanation for the absence of these pay stubs. The same is true if they spot any significant gaps in your employment. The important thing is for them to understand that you can come up with funds for your monthly mortgage payments. If you have valid reasons, these should be no problem. Otherwise, the lender will require further assurance of your ability to repay the loan.
3 – Most recent bank statements
People usually get a mortgage when they want to keep their available funds liquid for emergencies and other needs. It can also be because they just don’t have the money to pay for a house. However, it is still generally understood that you need to make a down payment to secure a mortgage. It also works to your advantage if you already have some equity in the home. The more money a borrower can pay for a house from the start, the lower the risk for the lender.
Still, the bank doesn’t want you spending all of your money to make this down payment. Instead, they want to ensure that you still have enough savings left for future expenses and personal transactions.
It is critical to note that they will definitely need your most updated bank statements. Even statements from over a month ago may not be considered recent. For all they know, you could have spent all that money already. So you also have to provide official statements from the bank and not mere screenshots taken from your online bank accounts. It has to clearly show your name, account number, and a complete list of transactions.
The lender will use the bank statements you provide to verify the income you declare and the payments you make for other loans. They will also use these to determine whether your funds are clean or if you have income and expenses you haven’t made known.
4 – Most recent credit card statements
Like your statements, which show your assets, the bank will want to see your most recent credit card balances, representing your liabilities. So if the statements you will provide are from more than a month ago, these will be useless for the lender because you should already have paid them at this point. And if not, your more recent statement will show how much you will be paying in interest.
Your credit card statement will also show whether you borrow more money than your limit allows, what kind of items you tend to purchase, and whether you pay on time and in full.
Suppose your credit card statement shows that you are indeed paying interest for revolving balances. This can indicate that you are incapable of spending within your means at the moment. On the other hand, if you consistently pay when you are required to, this tells the lender that you are a more responsible borrower.
The lender will also need to see all of your credit card statements. You cannot merely show one of all the credit cards you own. You have to declare all the credit cards you maintain, which they can quickly verify with one look at your credit report. There’s no need to leave out any information. In fact, it may be to your detriment if you do. The underwriter will add up all of your balances and compare this amount against your monthly income to compute your debt-to-income ratio.
What is your debt-to-income ratio? Your debt-to-income, or DTI for short, is a percentage of money from your income that goes toward debt repayments. Some lenders prefer borrowers with lower DTI ratios. A DTI of 50% or over signifies an income that’s already spread too thin on several loans.
If you want to work on your DTI, you can either increase your income or lessen your debt obligations.
5 – Statements for other payment obligations
Credit card debt is the most common for borrowers. However, if you have other existing debts, the bank will also want to know your most updated balances. These are your student loans, car loans, or even other mortgages. Rent payments, electricity, and other utility bills are not included in this regard.
As in your bank and credit card statements, you also need to provide the most recent records for your other debt obligations. The numbers obtained from this information will also go towards the computation of your DTI. The good news is they only use the minimum payments required to compute for your DTI ratio. So if you’re still far from paying your car loan in total, there’s no need to worry about declaring how much money you owe across the board.
Ideally, if you’re already paying too many loan obligations on a limited salary, you’re not supposed to get another serious commitment to pay for monthly. But worst comes to worst, you can pay down your other debts to lower your DTI before applying for a mortgage loan.
6 – Investment statements
Mortgages are collateralized loans. If you stop paying your mortgage down the road, the bank will foreclose your house and sell it to recoup their loss.
That said, the lender will also want to know just what kind of other assets you already have. Of course, they won’t have any say on these assets should you fail to meet your debt obligation because they already have your house for that. But they will need a clear picture of your finances and investments.
If you have funds in the stock market or you have time deposits, these are information that the bank will need to determine your total net worth.
7 – Proof of satisfied liens
If you have ever defaulted on a previous loan, you’ll know that your credit score gets a thrashing, and it stays that way for a very long time. Even after you have paid off whatever old obligations you’ve had, these are still going to show up on your credit history.
A home purchase needs a serious amount of money. That is why the lender will scrutinize every line on your credit report during the underwriting process. Therefore, there’s really no use hiding your previous financial situation from the mortgage lender.
As proof that you have already taken care of your past obligations, you have to show that you have paid these other debts in full. Before you even apply for a mortgage, you may want to view your credit report to see if any of these lines still appear there, so you can call up your previous lenders to remind them to submit the necessary updates.
Always remember to ask nicely. It is not your previous lenders’ responsibility to remove these negative lines on your credit report, even if you no longer owe them any money. After all, you’re the one who owed them a favor.
Is there anything else I should prepare?
Although we mentioned specific numbers in the previous section, like two months or two years, these requirements can still depend on your lender. Your situation can also affect what kind of documents they will demand.
Below, we’ll expound on some more things you should work on as you apply for a home loan.
1 – Credit Report
Everyone is entitled to a free credit report. It’s a no-brainer that whether you request for it or not, the real estate agent or the mortgage lender will want to know your credit score.
That said, you also need to make as much effort as you can to scan your credit report to spot any unfavorable lines that you may want to improve on before you get to the negotiating table. There’s also the possibility of errors, in which case, you’ll have to request the credit reporting bureau to have these corrected as soon as possible.
2 – Down Payment
It’s very common for relatives to provide you with gift money to make a down payment. Maybe you just got married, and your parents or your in-laws want to do this for you. If you apply for a Federal Housing Administration (FHA) loan, you can pull down payment money from these sources. Other types of mortgages will expressly require that you get down payment funds from your own savings accounts.
Since this down payment will represent your initial property equity, the lender will want to ensure that it doesn’t come from another loan. Therefore, your parents, your in-laws, or your relatives, whoever gives you this money, will need to put into legal writing that they will not ask for future repayment for the amount they will provide.
So if you’re excited to begin house-hunting, we’re right there with you! Just don’t forget that these are all the documents you’ll need to present during the home buying process.
If you’re a serious buyer, it’s better to become your own agent to take care of the requirements yourself. But if you want to find other uses for your time, a mortgage broker is usually just one meeting away.
Photo from Pixabay