If you are wanting to buy a home, one of the first and most important steps is getting Pre-Approved. Find out why!
I know that title isn’t very catchy…
But it is very very true!
Anyone wanting to buy a home in today’s very competitive market must have a Pre-Approval Letter. If you would like to purchase a property, it’s essential to be familiar with the mortgage pre-approval process. This article will explain what it means to be Pre-Approved and why you need to be Pre-Approved before you start looking at homes!
Why You Should Get a Pre-Approval Letter
It’s important for you to talk with your mortgage lender before starting the home buying process. The reason to talk to a lender is to get a Pre-Approval and set your home buying budget.
Pre-approval will let you know exactly how much you can afford. Making offers faster in the competitive market we are currently experiencing is important.
Today, the number of home buyers greatly outnumbers the number of properties for sale. This means home buyers need every advantage they can get. One way to demonstrate you are serious about buying a home with a pre-approval letter!
Understanding your budget will also give you the confidence to know which homes fit your budget and are truly affordable.
Freddie Mac talks about pre-approval on their website:
It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.
One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.
Including a Pre-Approval Letter with your offer proves you are a legitimate buyer. Sellers expect a home buyer to include proof of their ability to pay for a home before an offer is considered.
It isn’t just sellers that will take you seriously when you are pre-approved! If you email or call a real estate agent about a listing, they are going to ask if you are “pre-approved” for a mortgage.
You may feel that they are being nosy or pushy but there are 2 reasons why they should ask:
It’s Important For Them!
It’s Important For You!
The number 1 reason a Realtor asks if you have been Pre-Approved is safety! Real estate agents shouldn’t run out and show a home to every person who calls. Sadly, there are too many agents that have paid for this mistake by being robbed, beaten, raped or even killed!
They may ask to meet you at their office first and make a copy of your driver’s license. Making a copy of a driver’s license and your pre-approval letter won’t prevent a criminal from doing something heinous. But this is a simple precautionary request.
Realtors aren’t asking you if you’re pre-approved because want to know how much you can spend. They want to find out if you are a serious qualified buyer and ensure their safety!
A pre-approval letter indicates that the people they are working with can actually buy a home. Realtors don’t get paid unless the buyer they’re working with purchases a property. We don’t get paid to show houses.
The old saying that time is money is especially true for Realtors!
The reason it is important for you is so they can do the best possible job of advising you. Imagine looking at houses for weeks and you finally find the one…
Now imagine your excitement turning into heartbreak when you find out you cannot afford the home. It doesn’t do you a bit of good to look at homes for sale that you can’t afford!
Mortgage pre-approvals are normally good for a limited time. You need to discuss this with your lender.
You will notice that time is important when buying a home. Being pre-approved shortens the time between when you make an offer and when you walk out of the closing!
A pre-approval letter is a conditional commitment in writing that tells you the maximum mortgage you qualify for. Bear in mind, this is your maximum and not how much you must or should borrow.
You are going to want to want to remember your budget and stick with a monthly payment that is very comfortable!
What You’ll Need to Qualify for a Mortgage:
Getting pre-approved means completing your lender’s mortgage application. You will tell them about places you have lived in the past and where you have worked. You will give them info about your debt and credit. Finally, you will tell them how much you will be putting down.
Your lender will be looking at your 4 C’s to figure out how much you are capable of borrowing:
Capacity refers to your present and potential capacity to make the home loan payments. The mortgage lender looks at your income history and makes sure it’s steady.
The banks don’t want more than 41% of your gross income going to debt service. This is called debt to income ratio. Debt service includes the mortgage, interest, insurance and all your other debts. Your other debts include your car payment, credit card payments, student loans.
Capital is talking about the cash you have in the bank and any investments you have that can be turned into cash quickly. At the least, the bank must see that you have the resources to close. Some mortgages require a reserve to cover 1-6 months of payments.
Having adequate capital shows you can handle your money and have resources, besides your earnings, to cover the mortgage.
Collateral refers to the property that you want to buy. The lender will evaluate the property’s value as security against the home loan.
Your credit history will have a significant effect on your mortgage rate and the mortgages that you can get. Your credit includes whether or not you pay bills and other debts on time. Your credit score shows if you pay your bills on time and how you handle your financial responsibilities.
Most mortgages require a minimum credit score of 620 to 680. There are mortgages that go down to a 580 credit score but they are significantly less ideal for you. If you have a low credit score, you should wait and work on improving your credit score and bill paying habits before buying a home.
Getting a Pre-Approval Letter
During the pre-approval process, you will submit a mortgage application supplied by your loan company. The lender will take a look at your credit, finances and job history. There is usually an application fee to help cover the cost of pulling your credit scores.
Here are some of the documents that will be required when you apply for the mortgage:
One month of pay stubs
Or if retired your Pension Award Letter & proof of receipt
Or if disabled your Permanent Disability Award Letter & proof of receipt
Social Security Yearly Award Letter
W2’s or 1099’s for the past two years
Two years of tax returns if self-employed
1-3 months of bank statements with all pages for ALL accounts which will be use to provide the down payment and closing costs
Not all mortgages require the same documents and some may require even more. When your mortgage professional asks for a document, do not delay getting it to them.
This will cause delays in getting the pre-approval letter. It can also cause the lender to wonder if you are capable of the financial responsibility of a mortgage!
If your mortgage lender decides that you are qualified for a loan, they’ll give you a pre-approval letter showing the maximum amount you’re allowed to borrow. Again, how much your lender is willing to loan isn’t how much you should or must borrow. You must only borrow what is affordable for you and not bite off more than you chew!
The Take Away
Lots of people overestimate how much down payment they need and the credit scores required to get a mortgage today. If you are serious about buying a home, there’s a chance you’re going to be surprised by the great opportunity available for you!
That being said, the first step towards buying a home is getting pre-approved! I know it can seem like the lenders are nosy and they want so much paperwork.
Nothing good comes without working for it. And that includes getting pre-approved to buy a home.
But now you know why getting Pre-Approved is so very important!