Perhaps one of the most important things you can do to improve your chances of obtaining your dream home is filing for pre-approval.
Getting pre-approved for your home loan communicates a level of credit and financial worthiness in shopping for a home.
While pre-approval doesn’t guarantee the success of your loan application, is certainly helps you along. A small percentage of pre-approvals don’t turn into mortgage commitments, often because something is wrong with the chosen property. Still, in most cases, pre-approval is the key to getting the home you imagined for the price you deserve.
Pre-Qualification vs. Pre-Approval
Before we get started, it’s important to note the difference between pre-qualification and pre-approval. A mortgage pre-qualification is simply an estimate of how much you can afford to spend on your home. In comparison, a pre-approval is far more valuable.
Being pre-approved means your lender has checked your credit score, verified your documentation, and approved you for a specific loan amount. Once you’ve been pre-approved, there’s no question of your ability to pay a mortgage.
Usually, all that’s left is finding a house to call home. And, of course, getting a specific property approved by your lender.
Why You Should Get Pre-Approved
If you’re interested in purchasing a home in the near future, you should obtain a pre-approval.
Because, before you can make an official purchase offer, your real estate agent and the seller will ask to see your pre-approval letter. This letter proves you’ll be able to make the purchase (pending any property-related complications) should your offer be accepted.
Your pre-approval letter will last anywhere from two to three months, depending on the lender. This means, if you haven’t made an offer on a home in that period of time, you’ll need to get another pre-approval letter.
What You Need for Pre-Approval
There are five major items you’ll need for mortgage pre-approval, including:
- Proof of Income. After the Great Recession, lenders stopped offering no-verification or no-documentation mortgages. Now, you’ll need to supply W-2 statements from the past two years, several recent pay stubs to prove your regular income, and proof of additional income. This might include alimony, bonuses, or an inheritance. To complete this requirement, you’ll need your two most recent tax returns.
- Good Credit. It’s next to nearly impossible to get approved for a mortgage in this day and age without a decent credit score. The vast majority of lenders reserve the lowest interest rates for those with an impressive credit score of 740 or more. If you have a lower score, you’ll need to pay a higher interest rate or supply a larger down payment. If you want an FHA loan, you’ll need a score of 580 or more with 3.5% down. Those with a score of 580 or higher could also consider alternative programs like Beyond by Embrace.
- Proof of Assets. At this time, you’ll need to print bank statements that show, in no uncertain terms, you have the money to cover a down payment and closing cost. The amount of your down payment will depend on your loan. Under an FHA loan, you need only pay 3.5% of the cost of the home. Under a conventional loan, you’ll need to supply anywhere from 5% to 20% of the total. Since your down payment can vary so drastically, the pre-qualification process may give you an idea of how much to save up before pre-approval.
- Employment Verification. While pay stubs are helpful, they don’t prove you’re currently employed. Most lenders will be interested in calling your employer, both to verify you have a job and to clarify how much you earn. After the crash in 2008, lenders are wary of awarding mortgages to those without stable employment. If you’re self-employed, a significant amount of additional paperwork will be required to outline your income and business prospects.
- Additional Documentation. Finally, you’ll need a series of general documentation, including your driver’s license, your social security card, and your signature on a letter of approval to conduct a credit check. To keep the process straightforward, bring any documentation that you feel could be helpful in proving your stability, value, and assets.
The Stages of Your Home Loan Application
There are three basic stages in the mortgage application process, including pre-qualification, pre-approval, and mortgage commitment.
In pre-qualification, you’ll go through an informal process.
A mortgage professional will ask about your assets, income, and expenses. Then, you’ll get a general idea of the price range you can afford when searching for your next home.
In reality, pre-qualification doesn’t bring you closer to securing a mortgage, but it can help you understand your position.
In pre-approval, a lender will look at documentation, including credit reports, your employment history, and your income. From there, you’ll explore the loan programs for which you qualify, the maximum amount you can borrow, and the interest rates you might be offered.
It’s important to note that, during the pre-approval process, your loan representative is not the person responsible for offering and approving your mortgage. That person is called an underwriter.
Mortgage Commitment Stage
Finally, in the mortgage commitment stage, your lender will issue a letter approving you and the property you wish to purchase.
You cannot reach this stage until you’ve selected a property.
Because you’ve already gone through pre-approval, the documentation requirements for the mortgage commitment stage should be less stringent. You’ll simply need your loan representative to submit your application and approval to an underwriter. Then, the underwriter will return with final approval, approval with conditions, suspended, or denied.
Under suspension, your underwriter will request more documentation from you before making a decision. Again, investing time in the pre-approval process will help ensure this snag doesn’t come up during the home buying process — a time when you’re already thinking about a dozen things at once.
Contact an Expert for Assistance
Need more help with the pre-approval process?
If so, contact the mortgage experts at Embrace Home Loans. Our team offers a fresh approach to buying and refinancing.
Contact an experienced representative to learn more about pre-approvals, interest rates, and loan availability.