Getting pre-approved for your mortgage is one of the first things you should do when getting serious about buying a home. The pre-approval is a promise from your lender that you will be approved for your mortgage, subject to the home meeting specific requirements. Once pre-approved for your home loan, you will be issued a pre-approval letter that will show home sellers that you are qualified to buy their home when you submit an offer to purchase. They will know that you are a serious buyer.
During the process of getting pre-approved, your lender will review and verify your financial information. He or she will carefully review your credit, verify your income, and calculate your debts in order to determine the maximum loan amount you will be approved for and what interest rate you qualify for. After receiving your pre-approval, you are ready to start working with an experienced buyer's agent and previewing homes that meet all of your wants and needs.
Getting pre-approved for a mortgage is a great feeling.
The pre-approval letter is good for 60 to 90 days. It is not a full guarantee that your loan will be approved, but it shows that your lender is confident about it.
Pre-qualification or Pre-approval?
You have probably the terms "pre-approval" or "pre-qualification" mentioned when discussing buying a home. Many people use these terms interchangeably as if they are the same thing. Both pre-approval and pre-qualification indicate a lender's confidence in your ability to secure financing. It's important to know that they are related terms, but they represent different steps in the lending process.
Getting 'pre-qualified' should always be the first step that you take when you consider buying a home. The process is very easy and only takes one to two days. All you need to do is tell the lender how much money you make and how much you have in assets/debt (approximate). The lender does not pull your credit report or require documentation of your finances at this time.
Example of a pre-qual letter from Redondo Mortgage Center
A pre-qualification gives you a good idea if you qualify and approximately how much money you qualify to borrow. This is a great step to take when you are in your initial phase of searching for homes online. It gives you an idea of what types of homes and in what areas you can afford to buy.
This is where things get a bit more serious and more involved. You will want to apply for a home loan and get pre-approved before you actually start previewing homes in person.
This process involves completing a mortgage application and providing several pieces of financial documentation. The lender takes a much closer look at your finances for pre-approval than they do for pre-qualification. Pre-approval takes between one and three days. Once approved, you will receive a letter that shows how much money you can finance and what rate you are being offered. The letter is good for 60 to 90 days.
Example of a pre-approval letter from Redondo Mortgage Center
Preliminary Steps to Getting Pre-Approved for a Mortgage
Speak with a lender
Speaking to a lender and having them pre-qualify you is an excellent first step. You will get a good idea if you will be pre-approved for a mortgage. You may find out that you still have work to do on your finances. You may need to take care of a few credit issues in order to raise your credit score. You may need to save more money for your down-payment. This may seem like bad news at first, but having this information will help you get your finances to the level they need to be in order to get pre-approved.
Save for the Down-payment
Once you have consulted with a mortgage lender, you will have a good idea of what type of loan you have the best chance of being approved for. The loan product will determine the percentage of down-payment you need. You will have a great chance of being pre-approved if you can show proof of having your down-payment.
Start a specific fund for your down-payment.
Raise Your Credit Score
You may want to pull your free credit report to see your credit scores. You will also be able to review what accounts you have open and how much debt you have. Paying down debt and removing delinquencies will raise your credit quickly. Look out for personal liens as well. Liens will ruin your chances of getting approved for a home loan.
Find a Co-Signer if you Need One
You may have good credit and low debt, but maybe you don't have enough income to qualify. In that case, you could find someone to co-sign the loan with you. The combined income of you and the co-signer may get you to the income level required. Many first-time homebuyers have their parents or family members co-sign with them.
Applying for Your Mortgage
Once you have gone through the pre-qualification process and prepared your finances, it is time to get pre-approved. You will be officially applying for a mortgage. Completing the mortgage application is easy and is usually submitted online. You will be required to supply information such as:
Name, address (current and prior), social security number, etc.Names and ages of dependentsAsset informationIncome amount and employer information
You will be required to supply documentation to help verify the information in your mortgage application. Here are the documents that you will need to submit.
Download the RMC documentation checklist HERE.
1. Tax returns (Two Years)
Lenders want to see that the income shown on your tax returns matches what is shown on your pay stubs. This helps them verify income. You will most likely need to provide the most recent 2 years of returns. The lender may ask you to complete the 4506-T form that allows them to order copies of your returns from the IRS.
2. Pay stubs, W-2s, or Other Income Documentation
The tax returns will provide your lender with an overall picture of your earning history. In addition to the tax returns, they will want to see your pay stubs that cover the most recent month. The pay stubs will show help them verify that you are still employed as well as what your income is presently. The lender may even contact your employer directly to confirm that you actively employed.
Self-employed borrowers will need to provide 1099 forms as proof of income since they probably don't receive paystubs. The lender will also look at the bank statements for specific deposits to confirm income as well. Documentation of other sources of income will need to be provided. These sources could include child support, disability, pensions, rental income, alimony, etc.
3. Bank statements and other financial assets
Lenders will be assessing the level of risk that you present as a borrower of their money. This is why they want to see what assets you have. You will be providing them with 2-3 months of your statements for accounts including checking, savings, retirement, money market, and brokerage accounts. They may even want to review assets such as life insurance.
The lender typically wants to see that you have assets to cover several months of mortgage payments in case something changes with your income. The more assets you have, the less risky you appear.
4. Credit history
You will be asked to give permission for the lender to run your credit report. They will want to see how well you pay your bills or repay the money that you borrow.
According to Brady Benham, Finance Manager at Redondo Mortgage Center, lenders may ask you to provide a written explanation of any credit blemishes on your report. These could include delinquent accounts, short sales, or foreclosures.
"Your written explanation will help the lender further evaluate the level of risk that you present as a borrow," says Benham. "Lenders generally look at habitual delinquency differently than a one-time situation that was out of your control."
Want to check your credit scores now? Click here. It's free and does not lower your score!
5. Gift letters
If you will be receiving help from friends or family for your down-payment, a gift letter will be required. This letter simply states the amount of the gift and that repayment is not required. The letter should be written by the person(s) gifting you the money and their relationship to you should be identified.
6. Picture ID
Providing a photo ID such as a driver's license, passport, or military ID will confirm that you are who you say you are. It also confirms that all of your documentation is legitimate.
7. Renting history
If you don't already own a home and pay a monthly mortgage, the lender may want to see proof that you pay rent on time. It is not uncommon for a lender to request copies of rent checks that have been cashed by the landlord over the past 12 months. They may also ask the landlord to provide documents showing your on-time payments. If you don't have a long history of credit, your rent payment history becomes very important.
Ready to start the pre-approval process? Start Here
What to do once you are pre-approved for a mortgage
Once you are pre-approved and you have the pre-approval letter, you are now ready to submit offers to purchase your dream home. The pre-approval letter shows a home seller that you have access to the money that you are offering them for their home.
It is important to know that the pre-approval is not a guarantee of being fully-approved to receive funds. You will want to be on your best financial behavior once you are pre-approved so that nothing major changes with your finances. Here is a list of activities and actions that you should steer clear of until you have closed escrow on your home.
Don't apply for new lines of credit or credit cards
Your lender is going to do one final check of your credit right before closing on your mortgage loan. If that last check reveals that you have opened up a new line of credit, it will cause your final loan approval to stop in its tracks! When this happens, final approval for your loan will have to be underwritten again with the new financial information. This will likely blow up the timelines you and the sellers agreed to in the purchase contract and could jeopardize the purchase altogether.
Don't make major purchases
Whether you make a large purchase with cash or credit, it will impact your final loan approval. Using credit to make a large purchase will cause a change in your debt-to-income ratio. Making a large purchase with cash assets means that you will have less money for your down-payment or cash reserves. This large purchase should wait until you close escrow!
Don't pay off all of your debt
Don't do it! It may seem like a positive thing to do, but paying off all (or a large amount) of your debt will cause problems with your loan approval. Paying off credit cards could possibly close those accounts and thus drastically changing debt ratios. Also, your lender is going to want to know where the money came from to pay off those debts. When buying a home, it is always best to consult with your lender before you make any drastic financial moves.
Don't co-sign any other loans
Yep, co-signing a loan will affect your credit in a major way. You may think that it won't affect your credit because you are not the one that will be making the monthly payments on the loan, but it doesn't appear that way on your credit report.
Don't change jobs
Doing this could delay your loan settlement. Your lender will verify your employment right before the final loan approval. If your employer has changed since being pre-approved, the lender will most likely want to revisit the income verification. You may be asked to provide 30 days of pay stubs from the new employer.
Don't ignore your lender
Your lender will probably request many documents and a lot of information from you throughout the process. It is important to get them everything they request from you in a timely manner. If they ask you for something, it means they need it in order to get your loan approved. Ignoring their requests will certainly delay your loan approval.
Don't fall behind on your bills
Keep those bills paid and avoid overdrafts on all of your accounts. You want everything from the pre-approval review of your finances to look very similar when it is underwritten for your final loan approval.
Avoid doing these things and you should be free and clear to loan approval with no issues.
Go buy a home!
Getting pre-approved for a mortgage is the first step to achieving homeownership.
A strong pre-approval letter could be what sways a home seller to choose your offer over another, especially in a multiple-offer situation. A seller is usually more comfortable accepting offers from buyers that have larger down-payments with conventional financing. The bottom line is 'the better your financial situation, the more leverage you have when purchasing a home.'