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Mortgage Pre-Approval Process

Mortgage Pre-Approval - Step by Step Guide

Mortgage pre-approval is a necessary process to determine a borrowers buying power and monthly affordability.

A mortgage pre-approval is an official, comprehensive evaluation of the buyer’s financial situation that determines if the borrower qualifies for a loan, as well as the amount of the loan.

 

GETTING PRE-APPROVED

 

Getting pre-approved should be the first step in a home shopping process for several reasons:

  • A pre-approval provides a concrete and realistic purchase price, considering property taxes, home insurance and possible private mortgage insurance.  The “mortgage payment calculators” buyers find online typically do not take these additional expenses into account, and buyers are shocked to find out they qualify for much less then originally anticipated.  These calculators also often do not consider some of borrower’s debts and financial obligations that frequently do affect a pre-approval amount.
  • A pre-approval will specify the type of mortgage a borrower is obtaining.  A conventional mortgage (typically 3%-20% down payment) is fairly forgiving regarding the condition of a home a borrower may be interested in purchasing.  An FHA (3.5% down payment) or a VA (0% down payment) loans require the home to be in a turn-key condition.  Some condominiums are not FHA mortgage approved, therefore cannot be purchased with an FHA loan.  Speaking with a loan officer is a fantastic time to ask about a rehabilitation loan as well.  While not right for everyone, it is a great product to use with a home that needs remodeling and allows for the repairs to be financed.
  • The market is very interesting and if a good home is listed, it goes into multiple offer situation within 12-24 hours.  Pre-approval procedure may take several days and the buyer cannot participate in the bidding process on their dream home if they do not have the official document.
  • Sellers will not consider an offer that is not accompanied by a mortgage pre-approval letter.

It is important to point out that pre-qualification and pre-approval are two very different processes.  Pre-qualification can be done online or over the phone and holds no value.  Many sellers will not even consider an offer accompanied with a pre-qualification.  A pre-approval is a thorough process during which the lender checks full financial history, employment, credit report; all pertinent documents affecting the financial situation, all assets and liabilities.  A pre-approval letter confirms that a buyer can qualify for a mortgage up to a specific amount.

Another important aspect to consider is the monthly payment amount considering all of the unexpected additions such as property taxes, home insurance and PMI. A pre-approval provides specific dollar amounts, and buyers are able to make an educated decision on a purchase price.  Sometimes what they can afford is significantly higher then what they want to pay monthly.  All of these factors affect the purchase price of a property, a very important number to know before shopping around for a home.

 

APPLICATION

 

The process of getting pre-approved is fairly involved.  A strong buyer with at least two years of W2 income may consider any bank as their lender.  Banks tend to be very conservative with their lending and sometimes are not the best choice for a more complex buyer.  Self employed individuals or buyers with a high debt-to-income ratio may consider a mortgage broker. Mortgage brokers work with numerous financial establishments and can often pick a product that ‘works’ in a particular situation.  Our best advice is to shop around.  Multiple credit report inquires typically are considered as one inquiry during a “rate shopping” period if done within a 45 day window.

A loan officer will require documentation for all of the the following that apply:

  • Proof of Income
  • At least 30 days of pay stubs showing year-to-date earnings
  • Tax returns for last two or three years
  • Banking and investment account statements for last sixty days, all pages
  • Two to three years of W-2 and/or 1099 income statements
  • Divorce or Separation Agreement
  • Rental agreement on all rental properties
  • Pension Award Letter
  • Social Security Award Letter
  • Alimony/spousal support income/liability documentation

Documentation of any other income.

 

ASSETS

 

The lender will ask for documentation of all assets including bank statements, investment account statements, and others.  This documentation is necessary to show sufficient cash for a down payment and coverage of buyer’s side closing costs.

“Mattress money” or any undocumented cash cannot help the borrower qualify for a loan.  Most importantly, this is not the time to deposit any undocumented cash (winnings or cash gifts) into any accounts.  Money must be ‘seasoned’ for at least 60 days and sometimes longer to not raise any red flags with the lender.  If there was a cash gift, the giver must put together a notarized gift letter documenting the transaction.

 

LIABILITIES

 

The lender will consider all liabilities and financial obligations. These include but are not limited to car payments, student loans, medical bills, anything purchased with financing involved, etc.  Aside from a verbal confirmation of these liabilities, the lender will pull the borrower’s credit report to verify the information.

 

CREDIT REPORTS

 

The better the credit, the better the deal.  Strong buyers with credit scores of 740 and higher usually get the lowest interest rates and are able to choose their lender – a bank or a mortgage company.  An FHA loan with a 3.5% down payment will typically require a credit score of 620 or higher.  A borrower may have to purchase discount points on their loan to lower the rate.  Some lenders can process an FHA loan with a credit score above 500 but each situation is very different, and it is best to speak to a professional.  Minimum conventional loan credit score is 620.

Good credit does not equal qualification for a loan.  A borrower must not only have a good credit history, but also adequate cash flow, low debt to income ration and sufficient employment history.

 

MISCELLANEOUS DOCUMENTATION

 

Your lender will most likely also ask for an identification card, such as a drivers license or a social security card. As the process moves along, the underwriter may require further documentation of proof of certain assets, income streams or liabilities, like the lease agreement on an income producing rental property or legal documents explaining any legal arrangements.  The quicker those documents are provided, the smoother and faster the loan pre-approval is processed.

Occasionally buyers are surprised to find out that they cannot qualify for a loan at the present time.  Sometimes we are successful at referring these buyers to professionals we work with and can help them obtain a mortgage.  Other times, the financial situation needs work prior to being able to qualify for a mortgage.  In this case, the loan officer is able to recommend course of action that will make a buyer qualified to borrow in the shortest amount of time.

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