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2. Steady income
You'll also need to show lenders that you have reliable income. You can prove your income with pay stubs, W-2 forms, and tax returns. The amount of money you make in income will help determine how much house you can afford (see number six below). Steady income ensures that you can make your monthly mortgage payment on time and still have room in your budget to cover all your other expenses, such as food and utilities. For self-employed buyers or those with variable income (for example, someone who works on commission), you'll have to show additional documentation,3 such as tax returns and 1099 forms, to prove that you make enough to cover a house payment over time.
3. Cash for a down payment
Most mortgage loans require that you pay between 3% and 20% of the purchase price up front as a down payment. The down payment offers the lender some assurance that you are committed to paying for the house over time. It also provides an incentive for you to keep making monthly payments so that you don't lose your investment. Though it's possible to get a mortgage with a small down payment, a down payment of 20% or more will help you avoid paying for Private Mortgage Insurance (PMI).
Your lender will want to see various documentation when considering you for a mortgage. To make the process easier and ensure a faster prequalification, start gathering the following documents. This isn't an exhaustive list, but it covers the items most often requested4 by lenders:
- Proof of income: Grab your most recent W-2 forms, pay stubs, bank statements, and any other proof of income and have them ready to show your lender. This is key to proving you can make those mortgage payments.
- Tax returns: In addition to income, the lender will want to see your most recent tax returns (typically one to two years' worth).
- Documentation of debts: The bank needs to know how much debt (if any) you have — and how much you pay each month toward student loans, car payments, credit cards, or other debts.
- Proof of assets: If you have any investments, retirement accounts, savings accounts, bonds, or other assets, have proof handy. These assets enhance your financial profile and make it easier to get prequalified.
- Residence history: Past addresses, including landlord references, may be required. A strong history of past rent or mortgage payments will improve your chances of getting prequalified.
- Documentation of any gifts or loans for the down payment: First-time home buyers often get a little help from family members to make their down payment. The bank will need documentation of any financial gifts or loans (documentation such as a signed letter indicating that the money was a financial gift or a personal loan).
5. Good debt-to-income ratios
Lenders use this ratio to determine how big of a mortgage loan you can handle. The debt-to-income ratio (DTI) is simply how much debt you currently have in relation to your income. A high DTI might signal to the bank that you have too much debt for your income level and don't have room in your budget to pay a mortgage. A low DTI shows that you have a good balance between debt and income and can take on a mortgage payment. To improve your chances of getting a mortgage, work on lowering your DTI. You can do this by paying off credit card balances and car loans, or paying down student loan balances.
6. Know how much house you can afford
One last key to getting that mortgage prequalification is understanding how much house you can afford. This takes into account not only the purchase price of the home, but also how much cash you plan to pay as a down payment, what you qualify for, and what your income and monthly expenses are. Many financial experts recommend that your monthly house payment is no more than 30% of your monthly income. Not sure how much house you can afford? Use our handy calculator.
Ready to take the next step? Explore mortgage loan options from Synovus and contact a mortgage lender near you.