What You Need Know About Getting Pre-Approved
While most homebuyers start the buying process at an open house, the first step that you should take if you are serious about buying a home is getting pre-approved for your mortgage loan. By getting pre-approved first, you will have a great understanding of how much you can realistically afford and how much your monthly payment will be. Also, being pre-approved makes your offer much stronger when submitting it to the sellers as it shows them that you can confidently obtain financing. Plus, the pre-approval is typically free so there is no reason not to do it!
The first thing to know is the difference between being pre-qualified and being pre-approved. Being pre-qualified is when your financial institution does a quick check on your financial background and gives you a ballpark estimate of what they think you can afford. Where when you get pre-approved, your financial institution performs a much more thorough investigation on your financial situation and gives you a more realistic spending amount. So while being pre-qualified is a quick way of finding out how much you roughly can afford, being pre-approved is the only way to prevent you from shopping for a home out of your budget.
Here are the five things that must have when getting pre-approved:
1. Proof of Income - You will need to supply your W-2 statements from the past two years, your most recent pay stubs, proof of any additional income, and your last two years of tax returns.
2. Proof of Debts & Assets - You will need to present your bank account statements and investment account statements to show you have the funds for the down payment and closing costs. If you have any debts like credit card debt or student loan debt, you will have to report that as well.
3. Good Credit - Your credit score will have an impact on the mortgage interest rates that you receive. Lenders reserve the lowest interest rates for borrowers who have credit scores above 740. In addition, most lenders require a credit score above 620 for a FHA Loan. Sites like Credit Karma are great resources to give you a good estimate of your credit score.
4. Employment Verification - Some lenders will want to call your employer to verify that you are still employed and to verify your salary.
5. Identification - You will need to provide a copy of your driver's license and your Social Security Number. Your lender will also need your approval to run a credit report.
When presenting all of this information to the lender, don't fudge any of the numbers because you are only going to hurt yourself in the long run. Once you actually start the loan process, the lender will require that everything is verified.
Most of the time, lenders will provide you with a larger loan than you should accept. You should look closely at what the monthly payment will be. Barely being able to pay your monthly payment each month can put a lot of stress on you so it is always better to set your max budget lower than what you get pre-approved for.
Another important thing to know about being pre-approved is that it does not guarantee you that you will get a mortgage loan. Also, just because you get pre-approved with a lender does not mean that you are locked into getting your mortgage loan with them. I want to stress that it is important to first do your research and shop around your area for the best mortgage rates before going to a lender to start the pre-approval process.
To learn more about the mortgage process, check out our Mortgage 101 page. Come back next Wednesday for another great Real Estate Tip of the Week!