First Time Homebuyer Cheat Sheet: Understanding Qualifying Income and Documentation
One of the most important steps in the mortgage application process is understanding the various types of qualifying income and the documentation required to qualify for a home loan. Review the types of income below and identify which category you mostly likely fall under. As always, The Radcliffe Group is available to answer any questions and get you started on a pre-approval.
Salaried Employment Income:
The most common type of qualifying income is employment income. Lenders typically look for stable employment history, verifying income through pay stubs, W-2 forms, and employment verification letters. Consistency and reliability are crucial factors that lenders consider when assessing employment income.
Documentation Required: Pay Stubs and W-2 Forms:
As an employee, you’ll need to provide recent pay stubs, typically covering the last two to three months, to showcase your regular income. Additionally, W-2 forms for the past two years are necessary to verify your employment history and income stability.
If you’re self-employed, proving your income can be slightly more complex. Lenders will require documentation such as tax returns, profit and loss statements, and bank statements to establish the stability and viability of your self-employment income. Consistent and predictable income patterns are essential for demonstrating your ability to repay the loan.
For those who own rental properties or plan to generate rental income from an investment property, this income can be considered when qualifying. Lenders typically look for a history of rental income, often require lease agreements, bank statements, and tax returns to assess the sustainability and profitability of this income source.
Documentation Required (S/E & Rental): Tax Returns: For self-employed individuals or those with additional sources of income, providing tax returns for the past two years is crucial. This documentation helps lenders assess your average income, deductions, and overall financial stability.
Retirement income, including Social Security benefits, pension payments, and annuities, can also be considered qualifying income. Lenders may require documentation, such as benefit statements or award letters, to verify the amount and stability of your retirement income.
Documentation Required: Bank Statements: Lenders may request several months’ worth of bank statements to verify your income and track your financial behavior. This allows them to ensure that you have sufficient funds for down payment and closing costs and to identify any irregularities or red flags.
Remember to maintain clear and organized records of your income sources, including employment, self-employment, rental income, and retirement benefits. By providing accurate and comprehensive documentation, you’ll get through the pre-approval process easily.