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While window shopping for a home may be fun, SERIOUS homebuyers need to start the process in a mortgage broker’s office or over the phone, not an open house. Potential buyers benefit in several ways by speaking with a mortgage broker and obtaining a pre-approval letter. First, they have an opportunity to discuss loan options, budgeting, and their loan priorties with the lender. Second, the lender will check on their credit and alert the potential buyers to any problems.
Third, the buyers learn the maximum they can borrow and therefore have an idea of their price range. However, ALL buyers should be careful to estimate their own comfort level with a housing payment rather than immediately aiming for the top of their spending ability. Lastly, home sellers EXPECT ALL buyers to have a pre-approval letter when viewing their home and are more willing to negotiate with people who have proof that they can obtain financing. This step is extremely important because if you are not ready to purchase the home for any reason, you are inconveniencing the homeowner, listing agent, your agent, AND yourself. Most homeowners are still occupying their home during the sale process so they have to clean up and clear out for EVERY showing.
Pre-qualification Vs. Pre-approval, what’s the difference?
A mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on your home but it is just an assumption based on verbal communication between you and the mortgage broker. A pre-approval is much more valuable because this means the lender has actually checked your credit and verified your documentation to approve a specific loan amount (usually for a particular time period such as 90 days). The final step of the loan approval occurs when you have an appraisal done and the loan is applied to a particular property.
1. Proof of Income
"No verification" or "no documentation" loans are a thing of the past, so all borrowers need to be prepared with W-2 statements from the past two years (ALL pages, even blank), recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses and your two most recent years of tax returns (ALL pages, even blank).
2. Proof of Assets
You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs, as well as cash reserves. An FHA loan requires a down payment of as low as 3.5% of the cost of the home, while conventional home loans require 10% to 20%, depending on the loan program. If you receive money from a friend or relative to assist with the down payment, you will need a gift letter to prove that this is not a loan. ALTHOUGH, mortgage brokers have made lending extremely competitive between lenders so you may qualify for a loan with as little as 1% down.
3. Good Credit
Most lenders today reserve the lowest interest rates for customers with a credit score of 740 or above. FHA loan guidelines have tightened in recent months, too, so that borrowers with a credit score below 580 are required to make a larger down payment. Most lenders require a credit score of 620 or above in order to approve an FHA loan. BUT lenders will often work with borrowers with a low or moderately low credit score and suggest ways they can improve their score. If you need a recommendation for a credit repair company, contact me!)
4. Employment Verification
Your lender will not only want to see your pay stubs, but is also likely to call your employer to verify that you are still employed and to check on your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Lenders today want to make sure they are loaning only to borrowers with stable employment. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
5. Documentation
Your lender will need to copy your driver's license and will need your Social Security number and your signature allowing the lender to pull a credit report. Be prepared at the pre-approval session and later to provide (as quickly as possible) any additional paperwork requested by the lender.
The more cooperative you are, the smoother the mortgage process will be.
The Bottom Line
Consulting with a lender before you start the home buying process can save a lot of heartache later, so gather your paperwork or print some recent statements off your online bank accounts before your pre-approval appointment and before you begin house hunting.