Mortgage pre-approval: what it is and why you need it
You’re early on in the home buying, new construction or renovation process. You’ve just started looking and the excitement is building. Your thoughts wander to how your bedroom set will look in the new master suite, or how much you’ll enjoy that fire pit on summer evenings. But you’d be getting well ahead of yourself.
Before you decide on a realtor, and before you contact any seller, even before you tour a single home, your first concern should be financing. You’ll need to find out just where your true home buying budget lies. How much home can you afford? Is your credit solid? How much of a down payment can you swing?
These are questions a good loan officer can help you answer. You need to get pre-approved.
The pre-approval process evaluates your finances, resources and credit worthiness in advance of making an offer on a home. A letter of pre-approval marks you as a qualified buyer who’s poised to make a financial commitment. It shows sellers that you’re serious about buying and demonstrates the lender’s high level of confidence in your financial strength.
Many people don’t bother with getting pre-approved until they’ve found the home they want. But in a rising real estate market in which homes often sell very quickly, a seller may not be willing to wait for you to nail down financing. Time is often critical, and you may miss out of the home you just fell in love with. Pre-approval can give you a competitive advantage over others considering the same home.
Pre-approval is different than pre-qualification. Pre-qualification can tell you roughly how much home you can afford, but is says nothing about your credit-worthiness. The pre-approval process actually checks your credit and verifies documentation ahead of the offer stage.
What you’ll need to get pre-approved:
Proof of income
Be prepared to provide W-2 tax statements for at least the past two years as well as recent pay stub statements showing year-to-date totals. You’ll also need to document income from any other sources if you will be using that income as a basis for your loan.
Proof of assets
You’ll need to demonstrate possession of sufficient funds to cover your down payment, closing costs and other expenses, as well as adequate cash reserves.
Generally speaking, the better your credit, the lower the interest rate you’ll be able to secure. Most lenders save their best rates for borrowers with a credit score of over 740. Anything below that will likely result in a higher rate, or a requirement to buy additional discount points to lower the rate. Mortgage financing can still be had by low credit score buyers, but it usually requires a larger down payment or other concessions.
Pay stubs and W-2 forms will need to be directly verified by your employer. Lenders want to see a consistent track record that demonstrates stable employment over time.
You’ll need to provide a copy of your driver’s license (or state ID), social security number and sign an agreement allowing your lender to access your credit report. Individual lending institutions may also have additional documentation requirements.
Do your homework. Talk to your family, friends and coworkers to learn from their experiences in deciding on a lender. Even on its best days, mortgage processing is a complex matter. Communication is key. It’s not all about low rates, which can be manipulated to hide other costs and charges. It’s also about finding a level of trust and comfort with those you’ll be dealing with.
If you’re ready to start home shopping, get pre-approved first. Happy hunting!
Andrew Clarkson. Lake Michigan Credit Union, VP Regional Mortgage Production