This is Michael Anthony O’Connor with Community Home Funding if you’re thinking of buying a home but aren’t sure where to start, watch this video to take your first steps toward lining up the financing for your dream home.

Let’s begin with proof of income.

A mortgage is secured by a lender who wants to know that you will repay that loan over a long period of time. To make sure that it makes sense to lend you such a large sum of money, lenders need to see proof of your income. This is evidence that your income is sufficient and consistent enough that you’ll be able to handle the repayment of the loan.

Here’s what you’ll need to provide to verify your income. Different loan programs have different requirements, so this may not be a complete list, but is on average what your lender will ask for.

Tax Returns

One to two years of tax returns and W2s or 1099s

Pay Stubs

In addition to tax returns, lenders will also want to see 30 days worth of current pay stubs for W2 employees. Your tax returns show that your income was stable during the last two tax seasons, but current income tells lenders that you can still pay the monthly payment as of today.

Year-To-Date Profit And Loss Statement

If you’re self-employed, lenders require a profit and loss statement for the most recent year and will likely require a Year-to-Date statement as well. This assures your income from your business is consistent and stable enough to take on a sizable debt.

Letters Of Explanation For Gaps In Employment

If you’ve missed more than a month of work over the past two years, you’ll need to provide a letter to the mortgage company explaining why. A month without income can affect you for many months following, and lenders fear it could cause you to default on a mortgage.

Unemployment Income Transcripts

Typically, unemployment income is a temporary situation. If it occurs during an employment gap, a lender may ask for verification that you’ve received it.

Proof Of Real Estate Income

Rental income is a bit complicated. Any property that you don’t live in is acceptable if you can provide the necessary documentation. Living in a rental property doesn’t exclude you either, as long as you own a multi-unit property and live in one of the units. This income is generally reported on your tax returns, but lenders may ask for lease agreements to support this income stream as well.

Child Support Or Alimony Income

Child support or alimony payments can count toward your ability to borrow if you’ve received payments consistently for the last six months and will continue to receive them for the next three years. Why the extra requirements? Lenders know this income is temporary, but long-term payments can also help you meet your financial obligations. Be prepared to provide bank statements to prove you have received these payments and court records showing that you are entitled to these payments for at least 3 more years.

Proof Of Any Other Income

If you receive income from other sources, then your lender will ask for documents to verify that income. Using additional income may help you qualify for your mortgage, so be sure to let your lender know about all income you receive, no matter what it is.

Here are some of the most common additional types of income.

· Social Security income

· Long-term disability payments (not Social Security)

· Retirement (also government annuities and pensions)

· VA benefits

· Tips or gratuities included on previous two years of tax returns.

Each of these income types may require special documentation to evidence receiving, so talk to your lender in advance to ensure you’re prepared.

Down Payment

Different loan programs have different requirements regarding down payment, gift funds and seasoning. One of the most important details is where your down payment is coming from. This means that your lender will want to know the source of your down payment.

Source Of Down Payment Funds

If your down payment is in the bank, your lender will most likely ask you for the most recent two months of bank statements. If your down payment is coming from another source, then you will need to provide documentation of the source of your down payment funds. Many loan programs allow for gift funds, especially if they are coming from a close family member like a parent. Certain loan programs allow gift funds to cover all or part of your down payment, but they may also allow these gifts from other sources besides a close family member. Check with your lender for any restrictions before accepting a gift.

Assets

In addition to your down payment, your lender will also want to see that you have sufficient savings and liquid assets to cover your mortgage payment for a couple of months in the event something goes wrong. These are generally called reserve requirements and they vary based on the loan program you are getting approved for.

Your lender will look for cash reserve funds in your general checking and savings accounts, but lenders may also allow you to use certain retirement and investment accounts to satisfy reserve requirements so long as at least some of the money held in those accounts is sufficiently liquid, which means that is fairly easily converted into cash.

60 Days of Bank Statements

Bank statements are critical to determining the amount of cash you have readily available and how long you have had it. You’ll need to be ready to give your lender statements for at least the most recent two months. This allows the lender to confirm that your current balance isn’t reflecting a recent cash infusion, but instead that there has been a consistent balance of sufficient funds.

Credit Report

Your lender will pull your credit report directly to underwrite your loan, but it is a good idea for you to know what your credit report looks like before you apply so you can be prepared. You’re entitled to a full credit report at no cost from each of the three nationwide credit reporting companies—Experian, Equifax, and TransUnion—every year.

If you’ve had a bankruptcy, foreclosure, or any other special circumstances your lender may also want to see supporting documentation, so be prepared to provide documentation should they ask.

Bankruptcy Paperwork

Chapter 7 or 11 Bankruptcy has a four-year waiting period before you’re eligible to apply for most home loan programs. However, in special circumstances you may be eligible in two. For Chapter 13 Bankruptcy, the waiting period is typically two years from discharge or four years from dismissal. If you’ve filed bankruptcy more than twice in the past seven years, you’ll have to wait five years. Save all your paperwork and provide it to your lender if they request it.

Foreclosure Documents

Foreclosures typically require a seven-year waiting period before you can get a new mortgage. However, documented extenuating circumstances can shorten that to three years, as long as you meet other program requirements. Foreclosure alternatives like deed-in-lieu, charge-offs, or pre-foreclosure sales typically have a four-year waiting period. Most lenders will use the information that is included in your credit report, however; they may ask for additional paperwork, so be prepared to provide it should they ask.

Divorce Decree

If you are divorced, then your lender may ask for your divorce paperwork. This allows the lender to verify that assets and liabilities in both names are taken care of. Lenders may also use divorce paperwork to verify extenuating circumstances that may prevent someone from meeting obligations.

When Should You Start Gathering Up These Documents?

You should start getting your paperwork together as soon as you apply for a home loan. Your lender will provide you with a list of standard documents they need and once you meet with them, they will be able to provide you with a more comprehensive list of documentation that they will need to underwrite your loan.

The sooner you can start getting your paperwork together, the better. It will help streamline the process and keep things moving.

Regardless of whether you choose to submit your documentation to a lender who will review it upfront or wait until further in the process, once you’ve found that house and your offer has been accepted, you’re going to have to submit a whole lot of documentation to complete your application and receive a full approval from your lender, but in order to get into your dream home, it will be worth it!

Be sure to get all of your questions answered and if you need help, don’t be afraid to ask questions!