For many people, the thought of buying a home may seem daunting because of how many steps are required. However, if you break it down into multiple steps, the process isn’t that difficult. Over the next few weeks, we’ll be providing you with instructions for buying a home, step by step. . The first step of the home buying process? Getting pre-approved for a mortgage loan.
What does Pre-Approval mean?
A pre-approval means that a lender has reviewed your documentation, including your assets, income, and credit to determine how much you will qualify for to purchase your home. A pre-approval is stronger than a pre-qualification, which doesn’t necessarily include a full document review. During the pre-approval process, the lender will review with you the amount for your down payment, what your projected monthly payments will be, and an estimate of your loan fees. The amount you qualify for will be based on credit score, employment history, income, debts, and assets. Underwriting can be done either manually, or through an automated desktop underwriting or “DU” process in which the lender inputs your information into an automated system to determine what you qualify for. Once you are pre-approved, you will receive a written statement from the lender, indicating the amount for your pre-approval as well as the down payment and the interest rate the lender used when underwriting. Lenders will consider your credit score, employment history, income, and debts. When you are pre-approved, you receive a written statement from the lender with this information.
Does Pre-Approval guarantee a loan?
No, a pre-approval does not guarantee a loan from the lender. The pre-approval letter usually has conditions built into it, such as review of a preliminary title report and a satisfactory appraisal. Additionally, the lender may have “conditions,” requesting additional income documentation, explanations, and they will usually verify your employment during escrow. If your financial situation changes from when you first receive your pre-approval letter, the pre-approval is subject to change or cancellation. A pre-approval letter is not a commitment to make a loan, or a guarantee of specific rates or terms. It is simply a lender’s assessment on your financial situation and a preliminary decision that you are able to borrow a certain amount of money at a specific interest rate.
Why is it important to get Pre-Approved?
There are several reasons why getting pre-approved for a mortgage loan is so important. For starters, it gives you an idea of what you can afford, and what budget is comfortable for you. A pre-approval letter also shows both sellers and real estate agents that you are a serious buyer. In a competitive real estate market, you must have a pre-approval for sellers to seriously consider your offer. It shows your credibility as a buyer, that you would be able to make the payments necessary, and that you are able to act quickly when you find the home you want to buy.
The First Step
Before meeting with the lender, put together your financial documents. Consider working with a lender who is recommended by a friend, family member or the real estate agent you plan to work with. Talk with them over the phone before meeting with them and make sure you’re comfortable with their communication style. Check reviews online as well to see what type of experience others had.
What do I need when meeting with the lender?
When you are ready to meet with the lender, there are several documents you will need to bring along with you.
- Personal Information: You will need to bring a photo ID (drivers license or passport) along with your Social Security Number. The lender will be using the SSN to run a credit check, so you do not need to bring your credit report with you. The lender will also be able to determine your debts from the credit report. During the loan process, don’t take on any additional debts by buying a car or making major purchases on your credit cards. Once you’ve been approved, you won’t want to change your “debt ratio” (acceptable level of your income used to service debt) by borrowing more money.
- Income and Employment Information: Lenders will check that you are currently employed and will verify your income. For these documents, you will need to bring recent pay stubs, W2’s from the past two years, tax returns, and proof of any additional income such as a second job, overtime pay, bonuses, Social Security payment, retirement benefits, or child support.
- Asset Information: The lender will also like to see proof of any other assets you may have aside from your income. This includes information about any investments that you have and bank statements as well as retirement account statements and information about other property owned. Also, if you have a friend or family member who is giving you money to buy the home, you will need a gift letter stating that this money is given to you and is not a loan.
What happens next?
After the lender looks over the various documents, reviews your credit and either has the file manually underwritten or uses a desktop underwriting system to generate an approval, they’ll let you know what you qualify for. If you are approved, you will receive a written letter stating the purchase price and amount of the loan that you qualify as well as the type of loan — FHA, VA, or conventional financing — as well as any conditions, like satisfactory appraisal, preliminary title report, etc. Remember, the pre-approval letter does not guarantee a loan, and that most pre-approval letters are only valid for 60-90 days once they are issued.
Any questions on the process? Need a referral to a great local loan officer? Let us know!