Getting Pre-Approved to Buy a Home
Prospective homebuyers may be chomping at the bit as the housing market shows signs of recovery, but the path to getting a mortgage can be strenuous. Many housing markets have shifted to favor home sellers recently, meaning homebuyers face stiff competition and need to make themselves the most attractive candidate in order to get their dream home, and experts say step one should be getting preapproved for a mortgage.
What Is a Pre-Approval?
A pre-approval is a commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information. Most pre-approval letters are good for 60 to 90 days.
Why a Pre-Approval vs. a Pre-Qualification?
A pre-qualification is done by supplying the bank with your overall financial picture. You tell the loan officer your income, debt, and assets. The lender then gives you an idea of the mortgage amount you qualify for. This does not include an analysis of your credit report or an in-depth look.
A Pre-Approval is more in depth. You will have to supply your lender with the necessary documents to perform an in-depth look at your financial background and current credit score. The lender will be able to tell you the exact amount you are approved for. Many sellers will not accept a pre-qualification. It is best to get the ball rolling as early as possible so go for the pre-approval.
Why Do I Have to Get Pre-Approved If I Haven’t Even Found a House Yet?
A letter of preapproval can give buyers a competitive edge by showing realtors they’re serious when it’s time to make an offer. It gives the seller a lot more peace of mind that this person is actually going to get approved for the loan. If you make an offer on a house without a pre-approval, your offer will not be taken as seriously as another offer with a pre-approval. This could cause you to lose out on purchasing the home of your dreams. Many bank-owned homes will require a pre-approval letter upon offer submission.
The preapproval process also sets boundaries for buyers on exactly how much home they can afford, narrowing down the search by eliminating properties out of price range. It’s always tempting to overbuy because people always want more home than they can afford and that’s where you get into trouble, where you start exceeding 30% of your total gross income
What Is Involved In Getting Pre-Approved?
Looking at a variety of lenders can help borrowers find the right mortgage program with a lender they trust. Warren suggests looking at a few banks and at least one broker, who will shop another five or six lenders. Although it’s important to look at lender fees which can vary greatly, having a quality lender that is a little pricier can make all the difference. It may cost a little more but if they’re there when you need them and they’re the ones that hold your hand through the process, then it’s more than worth it. If you have someone who stays on top of it, it’s going to increase your chances of closing at a reasonable time. Remember it’s almost impossible to get the lowest rate, the best service, and the highest quality—there has to be give and take somewhere.
Documents You Will Need to Provide
Your W-2 from the past two years
Your paystubs for the past three months
Your tax returns from the past two years
Your checking or savings bank statements for the past three months
Statements for all your other assets (stocks, bonds, retirement) for the last 2 months
The name & number of your landlord (if you are renting)
Current mortgage documents (if you currently own)
Your divorcee decree, if applicable
If you are self-employed:
*Your business tax returns for the past two years
*Your year-to-date profit and loss statement and year-to-date balance sheet
The lender will also pull your credit report and score for you and your co-borrower (if you have one.) Most lenders charge an upfront fee of around $30-50 to do this. The lender will analyze your credit report for any red flags such as late or missed payments or charged off debt. Your credit score will affect your ability to qualify for a loan and determine how low of a rate you can get. Generally a score above 720 will get you the most favorable mortgage rates. Your overall debt (minimum credit card payments, student loan payments, car payments, etc.) will be analyzed to calculate your overall debt-to-income ratio. You will also need to provide any alimony or child support payments you are required to pay.
Calculate Total Costs
Remember there are more costs to consider. You might have to come up with a down payment, closing costs, escrows for taxes and insurance, etc. You’re lender or your REALTOR® should be able to help you with this.
What If I Can’t Get Pre-Approved?
If you can’t get pre-approved right now don’t give up. Chances are there are three areas that you will need to work on:
• Correcting any errors on your credit report and raising your credit score
• Decreasing your overall debt and improving your debt-to-income ratio
• Increase your down payment amount in order to qualify for the price