What Do Mortgage Lenders Review When Pre-Approving A Home Buyer?


Buying a home is an exciting time and there are a lot of moving pieces.  As a real estate agent, my job is to make the transaction as transparent as possible and demystify anything that seems confusing.  Which is why I want to talk about the loan pre-approval process.

When a lender pre-approves you for a loan, it’s done a deep dive into your finances and approved you for a specific loan amount based on what they’ve found.  Once you have this information, you know your price range and can tour properties with confidence.

If you’ve never gone through the preapproval process, here’s the documentation you can expect to provide and what the lender is actually looking for while reviewing it.

Last Two Years of Tax Returns

Lenders are looking for safe borrowers because safe borrowers are more likely to pay them back.  And one of the safest things to a lender is consistency. When a lender reviews your tax returns it’s looking for consistent net income from year-to-year.  If the income differs, the lender will use the average of the two numbers when underwriting your loan amount.

If you’re self-employed, your tax returns are extra important because you don’t have pay stubs or W2’s to provide as proof of income.  If you file separate tax returns for your personal and business income, you will have to submit both during the preapproval process.

Last Two Years of W-2s

Again, lenders require your W-2s because they are looking for consistency.  They want to see that you’ve had steady employment, ideally with the same company, for the last two years.  If you have a spotty employment history or had a lengthy period of unemployment, it doesn’t mean you won’t be able to get a loan.  As long as you have positives like a great credit report and current employment, these can mitigate negative aspects of your application.

Last Two Months of Bank Statements

Here, lenders are looking at how much cash you have and what your spending habits are.  They’ll look for overdraft charges which indicate you have trouble managing your money, and ask you to explain large deposits coming from unidentifiable sources as this money could be coming from illegal activities.  Lenders will also note any regular payments to individuals as they could indicate debt not accounted for on your credit report.

Last Two or Three Pay Stubs

If the lender requests your last two years’ tax returns and W2’s, why does it need these?  It wants to proof that you’re still employed at the annual salary you claimed.

So it will request pay stubs accounting for the previous 30 days of employment.

Credit Report

Apart from your credit score, lenders will review your credit report looking for: delinquent accounts, foreclosures, tax liens or civil judgments, unpaid collection accounts, number of recent applications for credit, and outstanding debts.  They want to make sure you’re good at managing your money and don’t already have more debt than you can handle.

The ratio of total debt (including your mortgage) to gross income lenders are looking for is anything lower than 43%.

If you’re like most buyers, you need a mortgage to purchase your home and getting preapproved for a loan is the first step. Don’t be discouraged by the amount of documentation lenders request.  Once the pre-approval has been issued, closing on your dream home is much easier.