What do mortgage lenders look for when they scrutinize your finances? It all boils down to financial stability and making sure you're a good credit risk.
On your application, you'll be asked to disclose personal finance information that will help the lender decide whether your finances are stable or precarious at that moment in time:
Salary / annual income
Lenders want to see that you're gainfully employed. If you're employed as a full-time employee, receiving a W2, that's going to be the best indication of financial stability. (Lenders don't assume you're going to be losing that job anytime soon.) If you're a 1099, or contract, employee, or if you own your own business, you can still buy a home or refinance, but you're going to have a tougher time proving that you're financially stable. Lenders see 1099 contract employees as temporary, even if you've been "temporarily" employed for years in this manner. Self-employed individuals (and those who receive 1099s) will have to show stable income for at least two to three years, which is usually done through tax returns.
Your lender may ask you to provide copies of your tax return (particularly if you own your own business), but you'll be asked to sign a tax form permitting the lender to pull its own copies of your tax return directly from the
Bank / retirement account statements
Lenders want to see how much cash you have on hand, and how cash has come into and out of your account over the past year (and sometimes longer, particularly if you're a small business owner or a 1099 contract employee). Large, unexplained cash withdrawals and deposits are a red flag, as are accounts with extremely low balances. If you've overdrawn your account, watch out. Lenders really don't want to see any sign that you're not managing your financial accounts with the utmost of ease.
Cash on hand
How much cash you have on hand is a bigger issue for lenders now than in the past. You'll need cash to pay closing costs, and to have in reserve. Lenders want to see at least a month's worth of expenses (mortgage payment, taxes, insurance) to make them feel as though you won't go delinquent on the loan payment at the first sign of trouble.
Credit history / score
You can get a free copy of your credit history and pay for your credit score (around
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Real Estate - What Mortgage Lenders Look For When They Scrutinize Your Finances
(c) 2011 Ilyce R. Glink. DISTRIBUTED BY TRIBUNE MEDIA SERVICES, INC.