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As a serious buyer, the best way to start the home buying process is by going to a trusted lender and obtaining a mortgage pre-approval. Mortgage pre-approval is an evaluation that determines whether, as a buyer, they are qualified for a loan.
Mortgage pre-approvals provide information that will benefit all parties during the home buying process. For instance, most sellers expect buyers to have a pre-approval letter, showing proof that the buyer can obtain financing. Also, through mortgage pre-approvals the buyer will learn the maximum loan amount they can take out. Through this process they have the opportunity of building a relationship with a lender, who then can discuss further financing and budgeting. Ultimately, the buyer will obtain information on their credit. If there are any problems that arise with their credit, they will be able to discuss options with a lender.
Pre-qualification Vs. Pre-approval
There are distinct differences between being pre-qualified for a loan and being pre-approved.
Though two terms seem similar these differences can change the outcome of the home buying process immensely. Pre-qualification is introductory step in the mortgage process. The process of being pre-qualified is completed by meeting with a lender and providing information such as, assets, income, and liabilities. Since, all the information comes directly from the buyer to lender, the amount gives in the pre-qualified can differ from the amount that is stated when being pre-approved. Being pre-qualified doesn’t carry the same value as a buyer who is pre-approved.
Pre-approval allows the lender to check the buyers credit and verify financial and employment information. This confirms the ability to quality for a mortgage, but approves a specific loan amount that is based off of the information from financial and employment documentation.
How to Get Pre-Approved
The process of getting pre-approved begins by completing an official mortgage application. The buyer will then give the lender all necessary documentation to perform an extensive check on their financial background and current credit rating. At this time, the lender will inform the buyer of specific mortgage amounts for which they will be approved.
The documents required for pre-approval vary depending on the choice of lender and the individual buyer. In most instances the lender will ask for documentation that represents the buyer’s income, assets, and regular payments that occur.
1. Proof of Income:
- Thirty days of pay stubs that show income and year-to-date income
- Two years of Federal Tax Returns
- Sixty days or a quarterly statement of all asset accounts:
- Additional Income
Lenders will require the buyer to provide bank and investment account statements to prove all accurate funds for the down payment, cash reserves, and the costs associated with closing on the residence. When money is “gifted” by a friend and/or relative for the down payment, the buyer will need letters verifying that the money is not a personal loan, and there is no obligatory repayment by taking the money.
As stated by Aiman Abozeid, branch manager for Inlanta Mortgage in Madison, Wisconsin, “It’s important to have a paper trial of where your down payment and losing cost funds are coming from”. He also shares that any type of money that is undocumented shouldn’t be used for a down payment. Any odd deposits should be documented with some type of deposit slip from your bank and an explanation that this deposit isn’t an “unauthorized gift”.
Any unexpected changes to the buyer’s finances need to be explained. If these changes in finances that benefit the buyer can’t be explained, then it most likely will not be counted towards their income.
3. Credit and credit score
Lenders will always check the credit of a potential buyer to let them know what they can afford to buy. Buyers come in at different ranges of credit scores. Those that have a credit score of below 580 are required to make a larger down payment of at least 10%. Individuals that have a credit score of 620 and above will be eligible for a FHA loan, which will qualify for a down payment of 3.5%. Any buyer that has a credit score of 740 and above will have the lowest interest rates available. However, lenders will often work with borrowers that have low credit scores and propose options to improve their credit score (Interest rates and down payments vary depending on lender and individual borrower).
4. Employment Verification
All lenders will require to see the pay stabs of any potential borrower. It is a possibility that the lender will call the borrower’s employer to verify employment and salary. If there has been a recent change of employment, the lender also may call the previous employer. Potential borrowers that are self-employed need to provide significant documentation concerning the business they conduct and their income.
5. Other Documentation
The borrower will also need to give a copy of their driver’s license (or state ID), social security number, and signature allowing the lender to pull a full credit report. Through the pre-approval process and after the lender will require additional paperwork. Borrowers should be cooperative for a smooth mortgage process.
Peter Boyle, a senior loan originator at Summit Mortgage Corporation in Plymoth, Minnesota, is stated saying, “If you have any unusual income or circumstances, you’ll need to provide other documents”.
What happens after the pre-approval process? The pre-approval process usually takes anywhere from two to four weeks. Online applications are starting to appear, depending on lenders.
Pre-approval comes with a conditional commitment in writing of an exact loan amount. This will allow borrowers to start looking around at homes around their price level. Making an offer becomes much simpler after getting pre-approved.
After finding the perfect home, the buyer will only have to fill in specific details, then the pre-approval will become a completed application for a loan. Loans become approved only after an appraisal is done. Then, the loan is applied.
If You Don't Get Pre-Approved
All is not lost if a potential borrower does not get approved. Buyers can ask their selected lender to send in their file to someone within the lending company for a second opinion on the loan. However, a letter defending the case of the loan is required and must have a strong reason why this should be reconsidered.
If the problem relies heavily on financial past, then the borrower has the chance to state the instance on their record was a one-time event. The one-time event must have defined by being a catastrophic event such as, unexpected medical expense, natural disaster, divorce, or death in the family. Proof of this and a flawless credit history must be provided.
Do not stop just if one lender rejects you. Find other financial institutions and apply for pre-approval that way. Each lender is completely different. However, if each lender is rejecting you for the same reason then, it has to do with your financial situation. The only choice is to fix the current financial problem.
According to the Consumer Financial Protection Bureau, a borrower can shop around for a mortgage, and it will not hurt their credit. Within a 45-day window, multiple credit checks from mortgage lenders are recorded on a borrower’s credit report as a single inquiry. This is because other creditors realize that they are only going to buy one home. Borrowers can shop around and get multiple pre-approvals, and the impact on their credit is the same no matter how many lenders they consult, as long as the last credit check is within 45 days of the first credit check.