Your Step by Step Guide to Mortgage Pre-Approval

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If you find yourself sitting in a strange hallway, waiting for a stranger in a suit to size you up and decide if you're worthy, as your palms sweat and your breathing gets a little shallow, you might be waiting for your appointment for your mortgage pre-approval.  You're one step closer to owning your own home, but this one is a doozy!

Let's talk about mortgage pre-approval step by step.

Step One:  Mortgage  Pre-Qualification Versus Pre-Approval

You probably already have a pre-qualification letter saying that you can probably buy a house in a particular price range, so why isn't this enough?  A lot of homebuyers find this part of the process confusing, and frankly, it can be.  Your pre-qualification was probably done over the phone, online or on your first meeting with your lender.  They asked you a bunch of questions about your income, your job, and maybe even pulled a "soft" credit report to get some idea about your debts.

Based on this information, they gave you the details on the kinds of loan programs you're elgible for and how much you can expect in buying power.  You probably got a letter that you could show your Realtor to help guide the buying process.  The difference between pre-qualification and pre-approval is simple:  a pre-qualification is based largely on your word.  If you give the lender incorrect information, they'll give you a pre-qualification letter that's not right.

A pre-approval, on the other hand, takes a harder look at your background and work history, and requires a full credit report and FICO score to ensure thar you can, in fact, pay back a note.

Step Two:  Documentation

Your next meetup with your lender is going to be to deliver documents, provide consent to pull a full credit repport and, if you've already found one, give them the information on the home you're planning to make an offer on (your Realtor can help you with this last part).

Documentation that you'll be asked to bring will include pay stubs, bank statements and tax returns, along with other information that may be needed to verify your income source or sources.  Self-employed people, for example, are sometimes required to prepare profit and loss statements (or just provide more tax returns).  If you have assets like a 401(k) or even a CD, you'll want to bring the details on these too.

Step Three:  The Loan Estimate Form

You're going to get a copy of something called the Loan Estimate Form, probably at the same meeting where your lender pulls the full credit report and takes all your documents,  This form explains exactly how much they expect you'll need to bring to closing, along with itemized estimated fees to plan for at closing.  If you're shopping around for loans, collect these and compare them side by side before you make your final choice.  Don't spend too much time crunching the numbers.  It is wise to get your pre-approval before looking for your home, that way you're ready to make an offer when you find the perfect one!

Step Four:  Acceptance

Once you've had a little time to review the paperwork and you've taken a final look at all the numbers, all that's left to do is call the lender you've chosen and let them know that you need that pre-approval letter sent over to your Realtor.  Understand that a pre-approval is not a guarantee that you're going to get the money you need to close,  Several things can go wrong along the way through underwriting, including, but not limited to the following:

  • Unverifiable income (this is often due to issues with overtime)
  • A change to your credit score.  
  • An increase in your debt to income ratio.
  • An undocumented change in employment.
  • Assets that are unverifiable.

The best plan is to be totally honest with your lender when you get your pre-approval so that there are no surprises and you don't get a last minute call telling you that your loan has been denied.  This actually happens more often than I'd like to say, so pay everything on time, don't take out any new credit lines or add to old ones, don't buy a new car, until you have the keys to your new home in your hand.

When is the Best Time to Make an Offer?

Ideally, you should have a pre-approval letter in hand before you so much as set foot into the first house you're considering for purchase.  This way you and your Realtor will know exactly how much you can afford, and won't waste your time showing you homes that are out of your price range.  And sellers won't think you are a serious buyer without having a pre-approval, nor will they be keen to want to negotiate under these circumstances.  In some areas, you cannot even make an offer on a home without a pre-approval letter or proof of funds.

Help your lender help you get the best deal on the home of your dreams, save everyone a lot of headaches and get that pre-approval first.  Knowing how much your closing costs are going to be will also help your Realtor write your offer accordingly, if they know they need to be wrapped into your mortgage.

Basically, the pre-approval letter is the key to home ownership.  So, no pressure.

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