Get paperwork together before you loan shop

DEAR MR. MYERS: I am getting ready to apply for a mortgage. What kinds of documents will the lender need to process my application?

ANSWER: Documentation requirements vary, depending on the lender’s own rules and the type of loan you are seeking. But you’ll probably be asked for copies of your W-2 forms that show how much you’ve earned over the past two years, as well as copies of your paycheck stubs for the last 30 days.

You will be asked to provide an employment history for the past several years that includes addresses of the people or companies you worked for and an explanation of any gaps between jobs. Lenders don’t mind if you took some time off to raise a child, but they get a bit nervous if you were out of work for several months for no apparent reason.

If you’re self-employed, figure on providing complete copies of your federal tax returns (including all schedules) for the past two years. You will also be asked for a year-to-date profit-and-loss statement and a current balance sheet for your business.

The lender will also want to verify where you’ll get the money to cover the down payment and the closing costs. So, expect to provide three months’ worth of statements for your checking and savings accounts, retirement-savings plan, stockbrokerage accounts and the like. If your parents or someone else is providing part of the down payment, the bank will probably ask them to sign a “gift letter” that says the money won’t have to be repaid.

Finally, compile a list of all of your outstanding debts — credit cards, auto or student loans and so forth — along with the name and address of each creditor, the account number, the current balance and your minimum monthly payment requirements. Pulling all this stuff together can be a real pain, but it’s better to do it now instead of waiting until the last minute.

DEAR MR. MYERS: We have been visiting several neighborhoods in our area, looking for our first house. It is now clear that we can afford either a small house or a fixer-upper in a fairly good neighborhood or a home that would be much bigger in a marginal neighborhood. Which would be the better investment?

ANSWER: A small house or a fixer-upper in a good neighborhood would be your wisest choice. Even the worst house can be restored to good-as-new condition. Conversely, it’s impossible for you to personally “fix up” an entire neighborhood that’s going downhill. A golden rule of home buying is that you should always choose a neighborhood first, and then look for the best home you can afford in the area you have targeted.

DEAR MR. MYERS: I am buying a house, but I am confused about how title insurance works. I always thought that title insurance is designed to protect the homeowner, but a woman I heard on the radio says it protects only the bank. Who is right?

ANSWER: It depends on the type of policy that you’re talking about. Many people don’t realize it, but there are actually two types of title-insurance plans. One protects the lender’s interest in the home, and the other safeguards the buyer’s ownership rights.

A lender’s policy protects the bank’s interest if, say, a long-lost relative of the seller appears after the deal closes and claims ownership of the home. The lender’s policy would cover the bank’s losses if the claim is upheld in court. Virtually all lenders require a buyer to purchase this type of coverage before a loan can be approved.

The buyer would have to purchase a separate owner’s title policy to get the same type of protection. Prices for the coverage vary based on the size of the loan and other factors, but usually range between $250 and $600 per policy.

DEAR MR. MYERS: I want to refinance my mortgage before rates go up, but I want to make sure my credit report reflects the fact that I received a big pay raise recently. How often do credit-reporting bureaus update the information they have about a consumer’s income?

ANSWER: Credit bureaus don’t keep tabs on how much you earn. Instead, you’ll provide your current earnings information on your loan-refinancing application, and the lender itself will verify your income with your current employer. The credit bureau is primarily concerned about how well you have met your debt obligations. It’s not responsible for tracking how much money your make now or how much you hope to earn in the future.

David W. Myers’ column is distributed by Cowles Syndicate Inc.