While the idea of looking around for your dream home may be exciting, you need to keep in mind that if you are serious about your house hunting search you’ll start your quest in a lender’s office rather than an open house.
As a potential home buyer you can benefit in several ways by getting pre-approved for your mortgage before ever stepping foot inside a property.
One benefit is that a lender can alert you of any problems or issues you may have in your credit report by running a check of your credit history. Another huge benefit is that you will be able to discuss the best loan options that will fit your budget
You can also have a better understanding of how much money you will be able to borrow and have a better overall idea of your price range. Keep in mind that you should base your price range on a price that you feel comfortable with. Just because your credit will allow you to buy a house worth more than you can afford doesn’t mean you have to buy a house at that price.
Another really important reason to be pre-approved for mortgage loan is that you will have a better negotiating position with sellers knowing that you already have financing in place.
Pre-qualification Vs. Pre-approval
Although a lot of lenders will provide you with a pre-qualification letter realize that it does not hold the same weight as a pre-approval letter. A pre-qualification can be useful to determine how much you can afford to spend on your home.
A pre-approval is what a lender will actually be willing to loan you based on your verified documentation and credit history. The pre-approval will only be for a predetermined time frame like 3 months for instance. The final loan approval occurs when you have an appraisal done and the loan is applied to a particular property.
1. Proof of Income
In order to get approved for a loan you are going to need to show that you have the means to pay back the loan by providing proof of income. Some items you will need to provide in order to verify your income will be W-2 statements from the past two years, tax returns from the past 2 years, recent pay stubs that show income as well as year to date earnings.
If you have any additional streams of income coming in you will also need to provide proof of that income to be considered toward the amount of loan you qualify for.
2. Proof of Assets
A conventional loan will require anywhere from 10% – 20% down payment which depends on the type of loan program. A FHA loan which is a special program that will allow more potential buyers to qualify for a mortgage loan because of the lower amount required for down payment.
A FHA loan can be as little as 3.5% down to get you into a house. At the time of the pre approval process you will need to provide bank and investment statements to prove that you have the funds for the down payment and other fees such as closing costs. 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.
3. Employment Verification
In order to verify your job your lender will want to see pay stubs and also go a step further and actually call your employer to confirm how much you make and if you are still employed with the company.
A lender may also contact a previous employer if you have not been with your current job for very long. Lenders today want to make sure they are loaning only to borrowers with stable employment. If you are self employed then be prepared to show additional paperwork documenting your business activities and revenue.
4 Good Credit
Having good credit will not only help you get approved for a loan easier but you can also have a better chance of locking in the best interest for your mortgage. Generally having a credit score of 740 or above ideal for lenders. If your score is below 740 then you may have to pay a little more interest. If you fall into this category you can still get a lower interest rate by paying for additional discount points that will lower your interest rate.
FHA loan guidelines have tightened in recent months, 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. If your credit is subprime don’t get discouraged because a lot of lenders will work with borrowers lower credit. Lenders can also recommend ways for you to improve your credit score.
5. Needed Documentation
You’re going to need to provide a copy of your driver’s license as well as your social security number and a signature giving consent to the lender to query your credit report. The lender may also ask you to provide additional paperwork to help make a determination on your loan application. If this is the case be sure you provide the requested documents as quickly as possible. The whole loan process will go a lot smoother if you are on top of your game and as helpful as possible for the lender.