Preapproval is not a suggestion, it’s a responsible requirement.
Would you load up your shopping cart at the store, knowing you don’t have your wallet or a means to “check out” and after you’re done, leave – hoping the cart is there when you come back for it? Of course not.
Serious buyers start the house buying process in a lender’s office (not an open house!) Clients that call me know that one of the qualifying questions I need to ask before I take them on a wild goose chase is if they have already started talking with a lender. I do this to save us all from lost homes, wasted time, let down and aggravation.
This is the “why”.
- Sellers may only negotiate with people who have proof that they can obtain financing or have the cash on hand to purchase.
- Would-be homeowners need to know without a doubt what they can afford to borrow and importantly, what that will cost them so there’s no payment shock.
- Lastly, most people presume there’s no problem with their credit and often don’t consider “debt to income” (DTI) however it does largely affect how much a borrower qualifies for.
Pre-qualification Vs. Pre-approval
There’s a big difference. A pre-qualification is just the first step to pre-approval. You might meet with the lender or do this over the phone or online and provide information about your income, assets and liabilities. Based on this basic information the lender will estimate what you borrow. If you have not provided the back up documents supporting all of this information, the lender really cannot issue a good faith pre-approval letter that acknowledges s/he has checked it and based on good information, the seller can pretty much be assured you’re good to go.
With pre-approval, the lender checks your credit and verifies your financial and employment information and documentation; this not only confirms your ability to qualify for a mortgage but approves a specific loan amount (usually for a particular period, such as 30, 60 or 90 days).
How to Get Pre-Approved
We start with a mortgage application. This can be done online with a bank, lender or mortgage broker. Then, supply the lender with the necessary documents to perform an extensive check on your financial background and current credit rating. From this data, the lender can tell you the specific mortgage amount for which you are approved. You’ll also have a better idea of the interest rate you will be charged on the loan.
Income & Assets:
__ Pay stubs for the last 30 days (keep every paystub from here on out)
__ Names and addresses of each employer for the past two full years
__ W2 forms for the past two years
__ Three month’s most current bank statements, mutual funds and investment account funds
__ Letter explaining ANY large deposits made into any accounts that aren’t typical.
__ Copy of gift letter, check and deposit receipt if applicable
If you own more than 25% of a business:
__ Corporate or partnership tax returns.
If self employed:
__ Tax returns for 3 years with schedules
__ Year to date profit and loss statement prepared by an accountant.
If you own rental property:
__ Tax returns for the last 2 years and current rental agreements.
__ Pension award letter
If you receive Social Security:
__ Social Security award letter
If counting child support as income:
__ Copy of divorce settlement
__ Copy of 12 months of cancelled child support checks
__ Names, addresses, account numbers, balances and monthly payments on all current loans
__ Explanations of credit report anomalies, including:
__ Late payments, credit inquiries in the last 90 days, charge-offs, collections, judgments and/or liens.
__ Bankruptcy filed within last 7 years (bring a copy of your bankruptcy papers)
__ Copy of DD Form 214, Report of Separation
__ Photo ID and proof of Social Security number
__ Residence addresses for the past 2 years
__ If applicable, a copy of your divorce decree
__ If you are not a citizen, a copy of the front and back of your green card
“It’s important to have a paper trail of where your down payment and closing cost funds are coming from,” says Aiman Abozeid, branch manager for Inlanta Mortgage in Madison, Wisconsin. “You can’t use any undocumented ‘mattress money’ for your down payment or money you’ve deposited from a credit card withdrawal or gambling winnings. If you have any odd deposits, you’ll need to document them with deposit slips and an explanation to make sure they aren’t unauthorized gifts.”
For example, if you are getting married and are relying on the cash wedding presents you will receive for a down payment, lenders want that money deposited into your bank account as soon as possible and may even want to see a copy of your wedding invitation to ensure that the date of the deposit aligns with the date of the nuptials.
Simply put, any sudden change in your finances – for better or worse, but especially better – will need to be explained, and if you cannot document it, it likely won’t be counted.