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Planning can help avoid surprises. Many people don’t know how to prepare for a mortgage application. Unless you have been through the process a few times, it can seem a bit mysterious.
Here are some pointers about how to get you and your finances ready for a mortgage application.
Collect your documents: It is common for people to have to provide lenders with 2 years of complete tax returns. This includes your W2’s, 1099s, K1s, etc. You will also have to bring pay stubs. If you own your own business, you will have to provide this and more. If you own a business, speak with your loan officer to know what documents are necessary.
Be able to talk about them<.i>: Deductions in your returns and your pay stubs may impact the income your lender will use to qualify you which, in turn, has a big impact on the loan you will get.
Base pay vs. Overtime: Be prepared to differentiate what is your base income and what is overtime pay. You will have to provide this information with your W2s and pay stubs for this. Your bonus pay is viewed differently from your base pay. Any changes in income will also have to be explained. This can include changing jobs and starting a new business. Be prepared for the loan officer to ask you about it.
Bank statements: Start collecting and organizing your bank statements. Lenders will typically evaluate the previous 3 months from when you sign your contract of sale.
Large deposits: A large deposit is any deposit that is larger than your typical paycheck. If you have a large deposit, Lenders want to make sure that you haven’t taken on any new debt that hasn’t appeared on the credit report. You will have to explain any and all large deposits (which are defined as deposits greater than your regular pay check) because lenders want to make sure you haven’t taken out any new loans that aren’t on your credit report.
Large cash deposits: If you can, try to avoid depositing large amounts of cash. If you sold something like a car or boat, be sure to hang onto that bill of sale or receipt.
Gifts: If you will be receiving a gift, consult your loan officer on how to document it.
Go over your credit report: It is a good idea to have your loan officer obtain a copy of your credit report. Everything is prone to errors. Go over the report to identify potential errors. This will give you time to have them corrected.
Credit card debt: If you are carrying debt. It is advisable to get your balances down. I recommend 30% of the available credit line. This should help boost your credit profile.
Seek advice: This may come as a surprise to some, but paying off certain creditors or accounts can have a negative affect on your score. If you are about to pay some big debts off, run it by your loan officer.
Preparation is key to purchasing a home: You have prepared for this step by saving money and increasing your credit score, but you also have to prepare by organizing your assets and showing a clear picture of your financial state.
Hedy Goldman has lots of knowledgeable information to share. She has been practicing real estate since 1996 and is a 2010 gold award winner at Windermere Real Estate SoCal. Hedy sells all over San Diego, but specializes in North County Coastal. She can be reached at (858) 504-2334 or San Diego Realtor.