Deciding to buy a house is an exciting milestone. In fact, it’s easy to get caught up in the thrill of it – making the list of all the things you’d want in your dream home and searching through listings online to see if you can find it. While many homebuyers might think the logical next step would be to start touring properties in person, the first call you actually should make is not to your Realtor, but to a lender.
Consulting with a lender can help potential homebuyers in several ways, including giving them a clear picture of what they can afford. A lender can explain different loan options, will check your credit and give you a heads up if there are any potential red flags, and tell you the maximum loan amount you can likely receive.
You may have heard the terms pre-qualified and pre-approved thrown around when people talk about lenders and the mortgage process, but it’s important to understand that those two terms don’t mean the same thing.
Pre-qualification is the initial screening process by a lender – it’s basically step one. You give them a peek at your overall financial situation like your income, assets and any outstanding debts. With that, the lender can give you a general idea of the loan amount for which you might qualify. However, pre-qualification does not look at your credit report or include an in-depth analysis of your financial background.
Pre-approval is the next step and will be more valuable to you as you get ready to make a purchase offer. The process is more involved than pre-qualification. You’ll have to supply your lender with documentation of your finances and they’ll examine your credit report. Once the pre-approval process is completed, you’ll walk away with a letter that states a conditional commitment for a certain loan amount. That letter will give you a leg up in the home buying process because sellers will know you are serious in making an offer and that you will be able to get the necessary financing. In fact, some sellers might skip over you altogether if you don’t come with a pre-approval letter in-hand.
Now that you understand a bit more about the process, what documents should you have at the ready for the pre-approval process?
- Income documents – this includes W-2 statements from the past two years; current pay stubs; proof of any additional income; and your two most recent years of tax returns.
- Employment verification – in addition to pay stubs, most lenders will also want to speak to your employer to verify your employment is stable and check your salary amount.
- Bank statements and investment account statements – these are necessary to ensure that you can afford the down payment and closing costs.
- Gift letters – if you get money from a friend or relative to help with the down payment, they will need to write a letter to show the money is a gift and not a loan.
- Credit report – a good credit score means a lower interest rate for you. A score of 740 or above will usually get you the lowest rates. But even if your score is low, it doesn’t mean you’re out of the running. Your lender can help make suggestions as to how you can improve your score.
- Personal information – copy of your driver’s license, social security number, marital status, etc.
A pre-approval letter can help put you ahead of other potential buyers, but it’s important to understand it’s not a guarantee of a loan. It’s only conditional. Once you’ve found a home and it’s passed the appraisal (meaning it’s been appraised at or above the home price), the lender will usually check your credit and income again to make sure nothing has changed from the time of pre-approval. Once the bank is certain it will lend to you, they will then issue a firm loan offer.