Shopping around for a new home is a lot of fun, but people who are really serious about buying a home should seek a pre-approved mortgage from lender people trust. As a potential home buyer, you will have a lot of credibility and knowledge on your side if you get a pre-approval mortgage letter from your lender before you go home shopping.
Potential home buyers benefit in many ways from getting a pre-approval letter from a mortgage lender. First, you will be able to talk about all of your loan options and how much home you can afford with the lender. Second, the lender will verify your credit score and will let you know what you can expect at your credit level. And third, you will learn how much you can borrow and will then know what kind of homes to review.
Another big benefit of having a pre-approval mortgage letter is that home sellers will generally expect you to have one. They are much more willing to talk to people who have been pre-approved for a home loan; if you cannot get a mortgage, then the rest of the conversation is moot.
A Word About Mortgage Pre-Approvals vs. Pre-Qualification
A pre-qualification can be helpful to estimate how much you can afford in a home payment. But a mortgage pre-approval is much more significant because the lender has run your credit and verified your financial documents. He or she can give you a good idea of how much home you can afford.
Final loan approval will come once you have the appraisal done on the property and the loan is applied to that specific home.
How to Get a Pre-Approved Home Loan
There are some very important things you need to know to ensure that you can get a pre-approval letter, and get one that will get you into the home of your dreams:
Proof of Income
You cannot get ‘no doc’ or ‘stated income’ loans anymore; that kind of loose lending is what led in part to the mortgage crash of 2008.
Today, you need to have your W-2 statements and tax returns for the last two years, as well as your pay stubs. All of this is needed to verify your income.
If you are self-employed, you should have no problem getting a mortgage if you are well established. You will need to show tax returns, possibly bank statements, and perhaps a profit and loss statement for the current year.
For the self-employed, one secret to know is that many who run their own business may deduct a lot of expenses. They may deduct so much that they have little taxable income left. That is great for reducing taxes, but it makes buying a home hard. The bank won’t take your word for it that you will have enough income to pay the mortgage: They have to see proof on paper.
Thus, in the year before you get a home loan, you may need to deduct fewer expenses. Yes, you may have to pay more in taxes, but it may be necessary for a mortgage approval.
Proof of Assets
You have to show a few months of bank statements as well as any investment accounts you have. This is needed to show at least that you can afford the down payment and closing costs. Some lenders on the conventional side may require cash reserves as well. If you are getting FHA loans, this is probably not needed.
An FHA pre-approved mortgage usually needs just a 3.5% down payment. On a conventional loan, expect 10-20% down. If you get a gift from a friend or relative to pay the down payment, you only need a letter that states it is a gift, rather than a loan.
Conventional lenders give the best interest rates to customers who have credit well over 700. Below that, you may have to pay a higher rate, or you may need to pay points to get a lower rate.
However, FHA financing is quite flexible on the credit side. You can get pre-approved home loans in many cases with a 640 credit score, or even down to 580 sometimes. You might have to cough up more for a down payment, but you still may be able to get a mortgage pre-approval with a FHA loan program.
As long as your credit is at least 640, the majority of FHA lenders will work with you. Once you get to 680 and above, virtually all FHA lenders will work with you.
You lender wants to see pay stubs but also may check with your employer that you still are working. They also may verify your salary. If you changed jobs in the last year, they may need to contact your last employer.
Employment verification is more prevalent today than it was a decade ago. But lenders need to ensure that borrowers are reasonable risks, with current employment.
If you are self-employed, they may want to verify that you have been self-employed for several years. They also will want to know how long you have been working in the same field.
Your lender needs to get a copy of your driver’s license or personal identification and social security number to get a credit report pulled.
The Bottom Line
Make sure you get a pre-approval letter before you shop for a home. This will give you more negotiating power. Follow the guidelines above so that you can easily get a pre-approved mortgage and get into your dream home!