Getting your first mortgage can be daunting at first. They’ll ask for multiple forms of information to prove that you’re worthy of a loan. And you’re probably asking yourself, “How many pay stubs do I need for a mortgage?”
When submitting a mortgage application, you need to have a minimum of 3 pay stubs for the mortgage. These pay stubs show the lender that you have a consistent income stream and will pay off the mortgage on time.
Throughout this article, we’ll give you clear insights into how you can prepare for the mortgage application process. Even if you’re self-employed, you can still use pay stubs to get approved. By the end, you’ll have enough information to get your mortgage started today.
How Many Pay Stubs For Mortgage
Loan lenders will require you to have a few pay stubs or proofs of the transaction history. Your lender will require you to show your W-2 form to get verified. In most scenarios, they will ask for proof of income from your employer, especially if you’ve switched jobs recently.
Additionally, you’ll need to provide information on your last two tax returns. The lender will obtain this information from the IRS. The IRS will send you a Form 4056-T to authorize them to release you to the lender.
You’ll need to provide at least 2 years of stable income to get your mortgage approved. This means that you cannot have any unemployment gaps during the 2 years. These days, your mortgage lenders are more concerned about you having a stable career before approving the loan.
They might also ask for a letter of recommendation from your employer. The letter should explain your hire date, salary, and employment status. If you’ve ever had to leave work, the employer must explain why you’ve taken time off and explain that your work is permanent.
Here are some other proofs of income you might have to show to your lender:
- Child Support Income: If you’re a parent that relies on this form of income, you must show it to your lender. You must show that you can receive payments three years after the mortgage is signed to get approved.
- Credit History: Your lender will pull out a credit report when planning for a mortgage. You’ll have to explain any financial blemishes created through your credit report. Lenders look at one-time circumstances differently than consistent financial delinquency.
- Rental History: If you don’t own a home, your lenders will request a rental history from your landlord to prove that you can pay on time. Your rental history is important, especially if you don’t have an established credit history.
- Bank Statements: Lenders will check your bank statements when considering mortgage approval. This can include your insurance and investments. Lenders ask for this information to see if you’ll have a few months of mortgage payments in the event of an emergency.
How Can I Find My Paystubs?
Based on how often your employer pays you, there are multiple ways to obtain a pay stub. Even if your employer pays you electronically, they might provide a paper pay stub for further verification.
Other employers might upload the paystub via an online portal. If you don’t know how to find your pay stubs, speak to your employer or manager.
You don’t have to hold onto the pay stubs after receiving your recent year W-2 and start filing for taxes. However, it is a great idea to have an electronic copy of the lender’s needs. For better organization, download your pay stubs for your personal records.
What If I Am Self Employed?
If you are self-employed, you’re already used to tracking and organizing income information. The lender will seek out employment verification through letters or emails based on the following:
- Business insurance evidence
- Current clients
- A licensed CPA
Since you’re self-employed, you’ll want to have your business look correct to prospective clients. You’ll want to have your financial status and application appear spotless when approaching mortgage lenders.
First, you should take a look at your current debt-to-income ratio. This metric measures how much you’ve made in income divided by how much that income is used on debt.
If you have a low debt-to-income ratio, the lenders will see you as a reliable borrower. That’s because you’ll have enough income to create a budget for your monthly mortgage payments.
To find your DTI ratio, use this formula: Monthly Debt/ Monthly Income (before taxes). Bills such as utilities and groceries aren’t considered debts and won’t be acknowledged by a lender.
If you have a DTI under 50% and want to have a mortgage, consider lowering the ratio. That way, you’ll have less debt and more income to pay your mortgage off on time.
Calculating Gross Pay
Also, you’re going to have to calculate your gross pay. Your gross pay is how much you’ve earned every pay period. To calculate it, divide your annual salary by how often you were paid.
Unless you have a consistent stream to multiple payments, your gross pay number might be large. If you’ve received $200,000 a year and were paid 10 times, your gross income would be $10,000.
Deductions are anything that isn’t taken from your income. For example, Social Security is a common form of deduction. Self-employed people will have to determine the numbers themselves.
The reason why is because they don’t have an employer that sends them the money. Check the IRS tax guide to see how much you should set aside for taxes.
After calculating deductions, you’ll have to determine your net pay. To find the Net Pay, use this formula: Gross Income – Deductions. So if you have a gross pay of $20,000, you might only have $18,000 after the deductions.
To conclude, you’ll need a few pay stubs for a mortgage. This tells the lenders that you are financially capable of paying off the mortgage quickly. So make sure you have your mortgage budget to ensure that you can utilize the loan to your advantage.