Mortgage pre-approval – how it works
Let's look at the importance of getting pre-approved. Most sellers will not accept a bid from a potential buyer unless they can show they have been pre-approved by a lender. In addition, realtors will not expend a lot of time taking you to look at homes unless they are convinced you have the ability to make a purchase. Having a pre-approval letter in hand can be very important for potential buyers; it can save you a lot of time and effort and it can also ensure the seller that you are serious as they would rather sell to someone who can pay them as quickly as possible.
There are various stages of pre-approval. Most lenders will hand you a document saying you are conditionally approved and they will add a long list of conditions. That type of mortgage pre-approval is often based on a cursory look at your credit report and often times is not worth the paper it is written on. What you need is a genuine pre-approval much like an offer with as few conditions attached as possible. A proper pre-approval will be a loan application that has gone through underwriting and usually has conditions such as approved pending an appraisal and a final credit check. Naturally, the home must be worth the the same or more than the amount shown on the application to protect the lender and the lender doesn't want to be surprised by finding out that you bought a car in between pre approval and closing.
Mortgage pre-approvals are free to you
The problem for the lender is that it costs time and therefore, money to do a complete underwrite of your loan and they will tend to do that only in circumstances where they are reasonably sure that you will complete a loan with them. We will be happy to explain how our complete underwritten pre-approval works when you contact us for more information. Anything less than a complete underwrite can be risky for you, the borrower. You may have placed earnest money on a property, only to find that one small item that the underwriter spots on you application, pushes you past your target date. Buyers have lost their earnest money because of relying on a cursory pre-approval document.
How to prepare for a pre-approval
Having the right documentation in place long before you start your home search is very important. Once you qualify and the house has been appraised at not less than the price the seller is asking, a lender will advance you the money to pay the seller, in exchange for your signature on a legal document or mortgage, that allows the lender to retain a financial interest in the property until you pay in full.
Most home buyers know well in advance that they plan to purchase a home. A major purchase of this nature requires that you produce fairly extensive documentation to the lender so it’s always a good idea to start gathering your documentation early. Some of the documents you will be asked to produce include, but are not limited to:
- Copy of most recent paystubs (dated within the last 30 days, covering at least 30-days of earnings).
- Copy of most recent two years’ W2’s and/or 1099’s (for all jobs held in last two years).
- Copy of most recent two years’ personal federal tax returns (including all schedules) signed and dated.
- Copy of social security, pension, and/or any retirement income award letters.
- Copy of most recent two months bank statements for all accounts (all pages required).
- Copy of most recent quarterly 401k, IRA and Investment Portfolio statements (all pages required).
- If you are expecting to bring EVEN ONE DOLLAR to the closing, the new Lender is required to verify & document the source of those funds per the Patriot Act of 2001.
Other things to consider when pre-qualifying
If you have been involved in a bankruptcy, foreclosure or short sale, your ability to qualify for a mortgage of any kind could be questionable. There are waiting periods depending on the type of loan you are seeking, usually less for FHA loans and VA loans than for conventional loans.
You will want to make sure that you have documentation regarding your exit from any derogatory event such as a bankruptcy or foreclosure, as underwriters will ask for written proof. We'll explain.
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You will want to make sure that you have documentation regarding your exit from any derogatory event as underwriters will ask for written proof.
All borrowers on a mortgage loan will be asked to show that they have two open lines of credit such as credit cards, car loans or store cards. While it may be beneficial to be cautious and avoid using credit cards, your ability to pay regularly and on time on small lines of credit is a good indicator to a lender that you will pay your mortgage on time. This is important!
And of course your credit score is vitally important. Most lenders will require that you have a score above 640 depending on the loan program, and some will work with you once your score is above 600. Any disputes on your credit report will have to be paid off or removed in order to provide an accurate measure of your credit score.
photo courtesy of Mark Moz, Creative Common License 2.0, modified from the original 640x426 to 640x360.