home loan pre-approval: what you need to do to get it

You’ve been working hard, love where you live and you are ready to buy a house.

You think you are, anyhow. But can you afford a house? Will you be approved for a mortgage? Before you start looking at houses or even talk with a realtor, you want to determine if you are able to get a home loan. No sense in getting all of the emotions involved and falling in love with a house if you can’t afford it, right? Ughhh, that’s the worst.

There are a couple of terms out there you may have heard: mortgage pre-qualification and mortgage pre-approval. What’s the difference? Girl, I’ve got you covered!

MORTGAGE PRE-APPROVAL

A pre-approval means that the lender decides you are, in fact, a good candidate for a loan.

Not only that, but they will let you know how large of a loan you may be approved for.

However, loan pre-approval is not a commitment from the lender and doesn’t state interest rates and terms.

MORTGAGE PRE-QUALIFICATION

Loan pre-qualification is basically just a conversation with a lender to get an estimate of what you might be able to afford. This can be done over the phone and without any paperwork.

You cannot write an offer on a house with this, you need the pre-approval letter!

HOW TO GET PRE-APPROVED

Before you make an offer on a house or even start looking, you will need to gather a number of documents in a folder. You will need these same documents again later, so keep the folder handy.

ADDRESSES

Be prepared to provide your addresses and dates you resided there for the past 2 years, including your landlord’s name and address if applicable.

Pay attention to this. Lenders pull information from various reporting agencies and the information is not always correct. But no worries, this is why we review this together and write any explanations if we feel it’s needed.

PROOF OF INCOME

You will want to collect the last two years of W2s, 1099s and tax returns. We will also want copies of your most recent pay stubs and proof of any additional income.

DEBT-TO-INCOME RATIO

Your debt-to-income (DTI) ratio should be below 45%, including mortgage and insurance payments. There are some programs, like FHA that will allow up to 55% and these are on a case-by-case basis where the underwriter has the ultimate say.

What is DTI? You add up all of your monthly income (before taxes, WAHOO), then subtract all of your monthly debts (loan payments, minimum credit card payments, new housing payment, etc.). Your debts should total less than 45% of your income.

So, if your income is $10,000/month, you want less than $4500 in debt payments each month.

EMPLOYMENT VERIFICATION

We will also check on your employment status. You want to ensure you have 2+ years at the same job or in the same field of work. Again, there are some exceptions, but this is the best rule of thumb. Your employer(s) will be called to confirm this information.

PROOF OF ASSETS

The lender wants to know that you are able to provide a good down payment. So, you will need to provide copies of recent banking account statements, investments or anything else you will use to draw funds from for the down payment and closing costs.

There are so many programs with low down payment assistance as well and we will discuss all of our options after we complete the application process.

GOOD CREDIT

In order to be approved for a home loan, you need good credit. The lender will ask for your social security number and permission to pull your credit. Typically, lenders seem to want a score of at least 620. You will need a credit score above 740 to get the best rates on a home loan.

Note that if you are buying a house with a partner or spouse, the lower score is what is used. So, if only one of you has good credit, you might try and qualify only using information for the person with the better credit. But again, we review all options together before we decide on the best path.

WHAT TO DO ONCE YOU ARE PRE-APPROVED

WAHOO! If you are pre-approved, we will issue you a pre-approval letter that is subject based on a revivew prior to writing an offer. But at this point, it’s safe to go house hunting!

Check with your lender, but the pre-approval is usually good for 60-90 days. Beyond that time, statements and information will need to be updated.

A WORD OF CAUTION

In our experience, most lenders will likely issue you a pre-approval for a loan amount higher than what you anticipated or feel comfortable taking. This is why we spend the extra time to fully understand your financial goals and what you’re willing to spend on a monthly basis prior to writing the pre-approval letter. We work together with your realtor so that the homes you’re considering fit within that set goal!

AFTER MORTGAGE PRE-APPROVAL AND BEFORE CLOSING

DO NOT MAKE ANY MAJOR PURCHASES

You might want to go start buying new large appliances or furniture now, but hold off until you have house keys in-hand. These large purchases send a worrisome signal to the lender and you may then not get final approval on your loan. Yikes, let’s not do that!

DO NOT CHANGE BANKS OR APPLY FOR NEW LINES OF CREDIT

Again, changing banks or applying for new lines of credit is a red flag for lenders at this stage. Just don’t do it.

ENJOY THE PROCESS

Getting a mortgage pre-approval will help clarify what you can afford. It also gives more weight to any bids you submit to sellers… meaning they will take you more seriously.

Once you have an accepted offer, we will review your financial goals again to ensure we fit within our comfort zone. We will then outline the entire remainder of the home loan process from start to finish so you know EXACTLY WHAT TO EXPECT. Communication is key! When the final documents are signed and you have your new home, you can celebrate.

Have you run into little bumps with mortgage pre-approval? We are here to make sure the process is smooth and friendly!