So you’ve decided to buy a house and make a home. Having made this decision you probably know what you want, but do you know what you can afford? The mortgage pre-approval is the best way to determine what budget you can shop in.
The Mortgage Pre-approval Process: What and Why
You may already have an idea of what you can spend and what monthly payments you can make, but the best way to get yourself a solid house-shopping budget is to perform a mortgage pre-approval. This will ensure that you have the ability to repay comfortably.
Getting a home loan is quite an involved process, mortgage lenders will want to look at many factors: your credit history and credit score, your debt in ratio to your income, your employment history and your assets and liabilities.
A pre-approval is actually filling out the mortgage application along with your Social Security number, so the lender can do a ‘hard’ credit check. Once you have the feedback from your selected lender, getting yourself credit ready for the purchase of your new home is only a step away.
What documents do I need for mortgage pre-approval?
There are a number of categories that you’ll have to supply documentation for when applying for your mortgage loan pre-approval:
Proof of Income
- Copies of your two most recent tax returns
- Copies of W-2 forms and your two most recent payroll stubs
Proof of Employment
- A list of employers for the last two years (minimum)
- This list should also include each employer’s name, mailing address and contact number.
This is a compiled list of other loans you’re currently repaying (car loans, student loans or even credit cards). You may need the supporting documents to show the proof of this list.
Bank statements from the last 60 days (or as recent as possible). One that is older than three months may not be enough for your lender to use as proof of assets.
There are a few additional documents that may give you the upper hand when applying for mortgage pre-approval:
- If a family member or friend intends to give you assistance on the down payment on your new home, ask them for a signed gift letter to show your lender.
- Divorce or marriage documents if necessary
- Perhaps consider performing an entire credit history for your lender, detail your credit report over the last few years and hand it to them so they can review that and perhaps advise what documents you may need to complete the pre-approval process
Once you’ve gone ahead and supplied all these documents, your lender will be able to tell your ability to repay the loan amount, and what you can commit to paying back monthly. This is when monthly terms become applicable, one person may be able to pay a loan off in 5 years, whereas another person, based on their credit score, may need 10 to 15 years to pay off their mortgage loan.
So I’ve organized my documents, now what?
Now you’re onto the next stage of the pre-approval, your loan officer will start to discuss ‘initial disclosures’ with you; which truth be told, is just a fancy way of saying ways to help you understand the credit terms and details of your proposed mortgage’.
In these ‘initial disclosures,’ you will receive a loan estimate which should detail the values of making the loan, as well as the ongoing costs and interest incurred. The line items on your loan estimate will be as follows:
- Loan amount
- Interest rate and APR (Annual Percentage Rates)
- Term (length of the mortgage loan)
- Monthly payment amount
- Closing costs
After your application has been reviewed, you will receive a simply ‘yes’ or ‘no’ decision. If your answer is yes, you will be issued with a pre-approval letter.
I have my pre-approval letter, can I shop now?
Yes, you can.
Basically, the pre-approval letter isn’t a guarantee set in stone that you will be able to lend the money, but it does show that you’ve potentially got the financial backing. You can show this letter to your real estate agent and the seller, it will give you the edge of being a serious buyer and that you’re truly ready to make the offer.
A Possible Flaw in Your Home Loan Plan
If you’re unsure that your ‘credit health’ may not be too good, you can opt to do a self-check or otherwise called a soft credit report to assess your own situation. This might give you a few months to fix any areas that may give your pre-approval a slim chance of going through. For example, you may have a student loan that had a few late payments, being able to rectify that gives you an advantage when opting for the mortgage pre-approval.