It can be overwhelming to shop for your first house. For that reason, you’ll have to start with getting pre-approved for a mortgage loan before you begin your search for your dream house. Knowing the mortgage application will help you with the official application, fortify your purchase offers, and set a realistic budget. Taking note of what you’ll need will also help determine how much you can afford for that house.
Going through the mortgage pre-approval process allows you to make better offers and shop wisely. Below is a guide that will help you throughout the pre-approval process.
What Is Mortgage Pre-approval?
Mortgage pre-approval refers to the process of identifying how much loan you can get from a lender to purchase your first home. A lender will evaluate your credit profile, assets, and income during the pre-approval process. Your information will aid them in determining your interest rates, how much you can borrow, and which financing options fit you.
Pre-approval versus Prequalification
The pre-approval and prequalification will help lenders determine how much you can borrow from them. But most lenders use these terms interchangeably. During the prequalification phase, your lender will only get a vague idea of who you are. You won’t have to present as much information about your financial resources. You also won’t be asked to establish a good credit profile.
Without this information, you’ll only get quotes. That means that the interest rates, financing options, and approval amount can change once the lender gathers more information. Because it’s the first part of the purchase process, you won’t have to supply documentation, including proof of income or bank statements.
During the pre-approval phase, lenders will evaluate you more thoroughly. Once you get their pre-approval, you’ll have to present documents, including proof of income or bank statements, to prove the assets you’ll use for the loan. Lenders will also conduct a more thorough credit check to assess your profile and what kinds of debts you have.
Pre-approval versus Approval
Getting the lender’s pre-approval is helpful when you’re already searching for your first property. However, you’ll still need their full approval after finding the property you’re planning to purchase. Remember that getting a pre-approval doesn’t mean your lender will approve your application. They’ll have to ensure that property details are accurate during this process. Here are a few points they’ll have to evaluate:
- Overall Appraisal Value: Your lenders will conduct an appraisal to ensure that you’re not paying more for what you’re getting. If the appraisal value is cheaper than the initial purchase price of the property, it’ll only complicate your loan.
- The Property’s Title: Your mortgage lenders will also work with a title company to check who’s registered as the property’s owner. That will also ensure no liens or claims against the property you’re aiming for.
- The Property’s Condition: Other loans require that the property follows specific standards before closing the deal. For example, if you’re applying for an FHA loan, problems such as a damaged roof, missing handrail, or cracked window will break the deal from closing.
What Do I Need for My Application?
Proof of Income
Lenders will use these documents to check your income for the past two years and your ability to settle the mortgage loan. Your salary will determine what requirements you’ll have to prepare. If you’re an income-earning employee, you’ll have to prepare the following documents:
- Most recent pay stub if your income includes incentives or bonuses
- Personal tax returns within the past two years
- Two most recent bank statements
- W-2 forms within the past two years
Because freelance contractors and self-employed individuals don’t get pay stubs or W-2 forms from an employer, they’ll have to provide the following documents as proof that they’re earning a steady income for the past two years:
- Proof of additional income, like Social Security
- Asset account statements, like investment or retirement accounts
- Balance sheets and profit-and-loss statements
- IRS Form 4506-T, which allows lenders to evaluate your tax records
- The most recent copies of your business license, if needed
- Business and personal tax returns within the past two years
Proof of Assets
Your lender will also assess your debt-to-income ratio during the pre-approval. Most lenders will want to get accurate information. They might ask for your most recent billing statements from existing credit cards with a balance or loans if you have one. In addition, your debt-to-income ratio will aid them in identifying how much you can afford and whether you’ll qualify for the mortgage loan.
If you’re a first-time buyer, you’ll soon realize that getting pre-approved is helpful, most especially if you’re setting a budget and an idea of much you can borrow from one of the local lenders. Most sellers will only consider a severe buyer if you allow the lenders to verify your credit profile and finances.