One of the best things you can do to ensure a smooth home buying process from the beginning is to prepare yourself with a home loan pre-approval. This means finding out if you will be able to borrow from a mortgage lender and an estimate for how much. Surprisingly, a large number of buyers go through their home search without being pre-approved. This is basically like going to the grocery store without your wallet.
We know it can be tempting to skip the more mundane aspects of the home buying process, especially for buyers who are excited to jump right in and start viewing homes. It’s important to remember that in a market as competitive as ours, many sellers will not accept an offer from someone who hasn’t been pre-approved. Why would they want to begin the process only to find out the person who wants to buy their home can’t afford it?
On the flip side, it’s also important to know how much house you can by before you start falling in love with properties. Loans can vary widely from situation to situation and the amount of money you think your lender will grant you vs. actual amount financed can vary as well. There are many things to take into consideration other than the loan amount itself, such as what your interest rate will be, how much you have to put as a down payment, how much your private mortgage insurance could be, and how much you will pay in taxes.
It can seem daunting to consider all of these things before setting foot in your first open house, but we promise, it’s important. To make things easier, we caught up with Jason Lewis from Supreme Lending to help walk us through the steps necessary to get a pre-approval.
Pre-Approval vs. Pre-Qualification:
There is definitely a difference between a pre-approval and a pre-qualification from a lender. You could say a pre-qualification is the first step, a lender’s estimation of approval based on the information you give them. A pre-approval refers to the verification of this information to determine exactly how much they are willing to lend to that borrower.
“At Supreme Lending, we consider a pre-qualification someone that we have gotten enough information to complete our application and have pulled credit,” says Lewis. “This is completely based off of what the borrower has either told us over the phone, online or in person. In contrast, a pre-approval is when someone has given us all their documentation, and we can actually verify the information that they put on the application.”
A pre-approval is usually good for around 90 days, and lenders will advise potential borrowers not to make any significant expenditures during this time. Final loan approval occurs when you have an appraisal done on a chosen property, and the loan is applied to it.
What You Will Need for a Pre-Approval:
To get pre-approved for a mortgage loan, the buyer will need to provide documentation of their assets, expenditures, and debts. The loan officer will want to know that you can afford to make payments on a mortgage if granted one. Here’s a list of what you will need.
1. Proof of Income: “Proof of income can be pay stubs, tax returns, an offer letter, or anything official that can confirm what the borrower is telling us about their earnings,” says Lewis. It’s usually best to arm yourself with the last two years W-2 statements, a recent pay stub that shows your monthly income as well as year to date income, and proof of any additional income from side businesses, bonuses, or alimony. It is also handy to have your tax return information from the past two years available for review as well.
2. Proof of Assets: Your lender will want proof that you have funds ready for a down payment and closing costs. “You will need to show them bank statements, quarterly retirements statements, or a settlement statement from the sale of another property,” advises Lewis. “Anything that can verify the borrower has assets.” It’s important to note that an FHA loan requires a down payment of at least 3.5% of the cost of the home, and a conventional mortgage requires a 10-20% down payment. If someone is giving you these funds, you’ll need a letter from that person stating that this is a gift and not a loan.
3. Good Credit: A potential homebuyer will need relatively good credit to be approved for a home loan. “The lowest possible score that we can do a loan on at this time is 580,” states Jason Lewis. “Score is a primary determination of a borrowers eligibility. Income, work history, and down payment are all the other major factors.” The interest rate that you qualify for relies heavily on your score. Borrowers with higher credit scores will get lower interest rates than those on the lower end. “We suggest having clients call us to go over their score in depth as we can give them information that can sometimes help them get their score up relatively easily.” One thing to remember, also, is that FHA loans will many times require a higher credit score since the down payment required is much lower.
4. Employment Verification: Having stable employment and a reliable source of income is very important to lenders. Especially these days, after the market crash several years ago. “Your lender will want to verify that you either are employed or have a job lined up,” adds Lewis. They may call to double check with your current employer, or call previous employers if you’ve recently changed jobs. Self-employed borrowers will need to provide more detailed verification paperwork to prove their annual earnings and ability to afford a loan.
5. Additional Documentation: You will want to have all of the aforementioned documentation ready to show your lender when the pre-approval process begins. You will also need to have copies of your driver's license, your social security card (or number), and your signature authorizing the lender to run your credit report.
The more prepared you are at the time you meet with your lender, the smoother the process will be. Once you’ve gathered all of the required documents, you can begin looking for the best mortgage rates in your area. It's a very good idea to shop around to ensure the lowest rate possible. “It’s important to look at, obviously, the rate itself, but the easiest way to determine a good deal (after the rate) is the bottom line,” advises Jason Lewis. “What it is going to cost you out of pocket at closing is important to consider when comparing loans.”
The loan officers you meet with should give this information to you. “Make sure get with a loan officer that will walk you through the process and take the time to go over all the details of getting pre-qualified, and your credit,” concludes Lewis. Additionally, in a market as competitive as ours, it’s important to choose a lender who has a reputation for fast, smooth transactions. If you’re faced with a multiple offer situation, a seller is likely to accept an offer that they are sure will be quick and painless.
Many times, your real estate agent can point you in the direction of a good lender, or vise versa if you seek out a lender first. Either way, getting a pre-approval before beginning your home search can save you a lot of heartache in the long run.