Show Me the Money: The ins and outs of getting a home loan

When a bank gives someone a home loan, they’re taking a gamble. In fact, loaning anyone anything is a gamble—how do you know you will be paid back?

But banks aren’t really risking as much as most people are when they give out loans. The bank can grab the house or car back if someone isn’t making their loan payments. Chances are you can’t take cousin Hal’s new business venture back. That money’s gone, which is why “they” say, “never lend money to family or friends.”

Now that we’ve established the unreliability of relatives, let’s move on to the bank giving you a home loanThere’s no one magic piece of financial information that will open the bank’s vaults, so to speak. It’s more like a puzzle: the bank asks for pieces, you hand them over, and hopefully there aren’t many missing or that don’t fit.

At first glance, the list of documents the bank asks for may be overwhelming. But in reality, if you’re organized, getting your “stuff” together is easier than it used to be—thanks to technology. Much of the financial information loan officers need can be emailed or uploaded.

If you’re not organized, get to it. Here’s the information the bank will typically ask for:

Bank statements, usually for the two or three months previous. These are to verify your income, checking and savings balances, and to make sure your target down payment is in your accounts.

Retirement and investment account statements, if you listed them on the loan application. These include 401k, stock investments and CDs. Submit all pages, even if there is nothing on them. You don’t want it to look like you are hiding something, like the lump sum from your big bank heist.

W-2s from the previous two year’s tax returns. This shows how much money you make, so the bank can see if you make enough to afford loan payments.

At least 30 days’ worth of pay stubs to make sure your current income is enough to repay the loan.

The past two or three years of tax returns.

“Gift” letter. Banks usually allow part or all of your down payment to come from a friend or relative (notice that’s a gift, not a loan). The person giving the gift has to sign something confirming they aren’t expecting you to pay it back (see paragraph one). They might want to see the gift-givers’s bank statements, as well.

Credit scores (one per each person that is asking for the loan). These don’t come from you, but permission for the bank to access them does. Your credit score shows anything detrimental in your credit history, such as late payments, collections and judgements against you. Generally, the higher the score the better, and the lower the interest rate you will receive. Your credit source also impacts the interest rate you’ll be offered. Check your credit score as soon as you can when you are planning to apply for a loan. This gives you the opportunity to bring your score up, if possible.

Proof of rental payments (canceled checks or information from your rental account) over the previous year, if you’ve been renting. Again, if you haven’t been paying rent on time, the bank wants to know. They might also request your landlord’s contact information. Hopefully you haven’t had to take him or her to court to force them to fix the AC. 

A copy of your divorce decree if you are divorced (obviously), to see if you are obligated to pay alimony or child support.

It’s as simple as that! The bank asks for extremely personal information and you give it to them. They judge you—do you make enough money? Do you owe people money? Are you reliable? If you don’t pay them back, do you have assets (money and property) the bank can take instead?

Don’t let the thought of finding and providing all of this information overwhelm or intimidate you. Just remember, the bank wants to be able to lend you money, so they can make more money (interest). Money, as usual, is the name of the game.

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