You feel like now is the time to buy a home; your finances are in order, and you have saved some money. But before going to deep into the homebuying process, you should first reach out to a few lenders to get a mortgage pre-approval or to get pre-qualified for a mortgage. This pre-approval will give you as well as your real estate agent an idea of how much of a home you can purchase. Having a pre-approval letter also lets home sellers know that you are a serious buyer.
Most lenders will use the terms pre-approval and pre-qualification interchangeably, but some lenders may ask for different information based on what term you use. A pre-qualification may not be quite as accurate because the lender does not receive as much information about your finances and won’t pull your credit. This means that the lender will be able to give you a rough estimate based on the information you gave them. As you are reaching out to multiple lenders to see what products they can offer a pre-qualification is a good starting point because it will not affect your credit score. Some lenders will only do a soft credit inquiry what does not affect your credit so double check before moving forward. If they are pulling your hard credit inquiry it will cause your credit to lower slightly so you will not want every lender to do this.
Once you find the right lender for your needs then you will want to get your pre-approval. This may require you to provide additional information like bank statements and pay stubs as well as having a hard credit check done so they can give you definitive numbers based on your credit score as well as your debt-to-income ratio.
Have your paperwork ready!
The preapproval process is a full comprehensive look at your finances making it basically a mortgage application. Here is a list of the types of paperwork you should have ready:
Proof Of Income
Make sure you have your current pay stubs or paid-in-full invoices (independent contractors or business owners) together to show that you have an income. No lender will provide a loan without knowing that they will be paid back.
Similar to the proof of income, lenders will want to know that you are gainfully employed as part of getting pre-approved for a mortgage loan. This will require you to show your W-2 Or 1099 from the past year. If you are new to a job, they may require a letter from your employer saying that you work them as well as your salary.
Proof Of Assets
Along with proof of income, lenders may ask for proof of your assets. This would give the lenders extra insurance that you are able to pay for the loan. Some assets that should be mentioned are: cash/ cash equivalent assets, physical assets (properties, cars, boats, etc.), nonphysical assets (pensions or 401(k)’s) and liquid assets (readily tradeable bonds or stocks). These are all helpful to determining what you can afford.
Lenders preparing mortgage per-approvals will ask for a few of your bank statements to see what you have saved, how you are spending your income and to confirm the information that you provided originally.
Lenders will review your credit history to see how well you have done at paying off your debts. Do not pull any other credits during this process because it can affect your score leaving you with a smaller mortgage per-approval than what you could have originally received.
Debt-to-income ratio (DTI)
Along with credit history, mortgage lenders will want to see what your Debt-To-Income ratio. This will involve all of your current debts versus your income. Your debts would include student loans, car loans and every other monthly payment loan that you may have taken out.
State Or Federally Issued Identification
Finally, you will need to have your identification. The lenders will need to make sure you are who you say you are so they will require your Driver’s License (State ID/Passport) as well as your social security card. Passports and other official documents may also be required, depending on your nationality.
Pre-Approval Letter – Approved Or Denied
Now that all of your paperwork is submitted you should hear back within a few business days on if you were approved as well as how much you can borrow.
If you are approved, you will receive a formal mortagage preapproval letter that you can show to your real estate agent so they can help you find the perfect home within your price range. This will save you as well as the agent time looking at properties outside of your budget. The preapproval letter is generally valid for 60-90 days giving you time to look for the right property. If you have not found a property within this time period, you can get renewals by sending updated financials and credit information to the lender.
If you are denied, it is most likely due to your credit and financial standing. Make sure that you don’t have a change of employment during the process, take out a new line of credit or accrue new debt. These drastic changes affect your credit and financials and cause lenders to deny your loan request. Some other reason you may be denied include the appraisal coming in lower than the purchase price or even if the lender company pre-approval guidelines change.
Even with the pre-approval you will still need a full approval by the lender, in order to secure the mortgage upon and accepted offer. This full approval will come down to the lender’s requirements based on the mortgage you are taking. All mortgages will require an appraisal value of the home. This is to protect you as well as the lender making sure that you’re not paying more for the home than it’s worth. If it comes back lower than the purchase price it can affect your loan. Another requirement by the lender is the title. The lender as well as your attorney will work to make sure that whoever owns the property has no claims or liens against it. Finally, depending on what type of mortgage you are taking the homes condition will also be taken into consideration. If you decide on an FHA loan, any neglected issues like broken/cracked windows, missing handrails or older roof cause difficulties with a smooth closing. If you are a first time homebuyer in New York you may want to look into some of the first time homebuyer programs available to help with the purchase of your home.
While a mortgage pre-approval letter is just an early stepping stone to the homebuying process, it is a very important step. Having your financial information verified speeds up the process for you, your real estate agent as well as the seller giving you a head start on your house hunting!