Smart shoppers start their home buying journey at a lender’s office, not by browsing on a home listing service, like Zillow or Trulia. Why is that so? Buyers who consult with a lender and become pre-approved for a mortgage first benefit immensely from understanding just how much house they can afford before shopping. For those who may not be familiar with the mortgage lingo, we wrote a guide to answer everything you need to know about getting pre-approved for a mortgage, below.
Mortgage Pre-Approval: What is it and why is it important?
A mortgage pre-approval is a process that involves a mortgage lender reviewing your financial situation and credit — by pulling your reports and scores — to determine how much they are willing to lend you. If you meet the minimum criteria, you will receive a pre-approval letter that indicates how much of a loan you qualify for based on your financial status. So, why is this an important first step for all home buyers?
Firstly, a pre-approval letter will give you a better idea of how much house you can afford so you can confidently shop in your price range. When shopping for homes in your newly identified price range, we recommend looking for a home that’s less than the amount you’re pre-approved for. This is because the total cost of the home does not include extra costs such as property taxes, home insurance, and other costs associated with homeownership. Secondly, the letter shows sellers you’ve already started working with a lender, and the lender is willing to work with you. Sellers are more likely to feel confident working with you knowing you have proof that you can obtain financing. Lastly, obtaining a pre-approval letter is especially valuable in a seller’s market where competition for homes is high. Often, when it comes down to competing bidders the pre-approved buyer is more likely to win the dream home.
Pre-Approval vs. Pre-Qualification
Although a pre-approval and a pre-qualification can give you an estimate of how much you can borrow, a pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home. A pre-qualification gives you an estimate based on the information you choose to provide your mortgage lender, while a pre-approval provides you with a much more definitive estimate based on your financial situation.
What You Need to be Pre-Approved
The items needed to be pre-approved for a mortgage may vary, however, most lenders will ask for some or all of the following:
- Income Verification: Lenders will typically ask for your two most recent pay stubs, W-2 statements from the past two years, and proof of any additional income such as alimony or bonuses.
- Monthly Expenses: Your mortgage lender may ask for an itemized list of your monthly expenses. These can include rent and utility payments, alimony, child support, and other loan payments such as student or vehicle loans.
- Place of Residence: Prepare a list of the addresses for any place you’ve lived over the last two years, or over the past several years, depending on your lender.
- Proof of Assets: Your lender wants to know that you have the means to pay the mortgage back, so they will typically ask for bank account numbers and balances for any checking, savings, or money market accounts to verify cash reserves.
- Employment Verification: Prepare a list of your employers for the last two years, including name, email, and phone numbers. Your lender may call your employer, or your previous employer if you’ve recently changed jobs, to verify your salary and employment status. If you’re self-employed, you will be required to submit additional paperwork as a part of the application process to verify your income and the health of your business.
- Gift Letters: If you are receiving monetary gifts from friends and family to help with your down payment, you will need to provide a gift letter from the donor(s). In the gift letter, the donor will need to state the amount of the gift and explain their relationship to you, and that they do not expect repayment.
- Social Security Number(s) & Drivers License: Your lender will need the social security number and a copy of the driver’s license of anyone who is on the mortgage loan to verify your identity and pull your credit.