Pre-Qualifying Then Home Loan Approval

It seems natural to find the home you want to buy first, and then deal with financing second. What you should know is you run the risk of losing that home if you don't get your financing prequalified first.

Why get prequalified for a mortgage before you begin your search for a home? Because you, your agent, and the seller will benefit from it.

The most important benefits, of course, are for you. The most common question Real Estate Agents get from home buyers is, "how much house can I afford?" There are many variables--credit history, income, debt, and special mortgage programs--to keep an agent from answering that question with a simple answer. The only true way of getting the question answered is through prequalification by a lender.
The loan prequalification step is a simple one, but it is an extremely important one. It begins the process of formally applying for a mortgage, and it gives everyone involved--especially you--a clear idea of what you are capable of buying.

By knowing what your financial parameters are, you and your Real Estate Agent can spend more time looking for houses that fit you and avoid looking at houses you can't afford to buy. Keep in mind, no matter how much you might desire a 5000 square foot home for $350,000, if your qualifications say $200,000, then what you will ultimately be able to get will be a $200,000 house regardless of how many $350,000 houses you look at or put offers on.

This brings us to the seller of the home you want to buy. Imagine you find a home you want to buy, but the seller has offers from other buyers. A prequalification will strengthen your bargaining position over other buyers who don't have it because it tells the seller you really have the ability to buy their home. Put yourself in their shoes. Would you take the chance on the buyer that perhaps may not be qualified?

There are huge advantages to taking the next step and being "Pre-Approved."
• You know exactly how much money you can qualify for
• You can determine what monthly payment amount you are comfortable with

• You can look at the "right" homes
• You minimize the stress of not knowing if you can qualify
• You minimize the trauma of finding out your dream home is unobtainable because you can't afford it
• You have higher negotiating power because you will have a "Pre-Approval Letter" in hand, this tells the seller he has a serious offer to consider
• You can save money dealing with a comfortable seller

Pre Approval
Once you narrow down which type of lender can best meet your needs, the next step is to get pre-approved for a loan. Pre-approval is not the same as pre-qualification. What's the difference between pre qualification and pre-approval?

Pre-qualification is an estimate of how much you can afford in a mortgage payment. It is based upon the information provided by the borrower, which will later be subject to the approval process, and the buyer will need to provide additional information, including a credit report, appraisal, income verification and other documents. The information provided by the borrower is not routinely verified as part of the pre-qualification process. For Loan Approval you will need the documents in the checklist. (See list and Link to printable form below)
Pre-approval is a firmer commitment on behalf of the mortgage company. Obtaining pre-approval is a more formal process that includes a credit check and employment verification. During a pre-approval, the mortgage company does all the work of a full approval except for the appraisal and title search. The lender obtains a credit report to verify monthly payments on installment loans and credit cards, and to check payment history of these loans.

If you've been pre-approved for a loan, you can shop for a house with more certainty and less anxiety because you'll be able to sail through the entire process without having to worry about whether the mortgage will be approved. Additionally, the seller is likely to view you as a more capable buyer. This can give you an advantage as a buyer in the marketplace, especially when the seller is considering multiple offers.

However, neither a pre-approval nor a pre-qualification means you are guaranteed a mortgage. Lenders still need to look at property appraisals, verify information, and in many cases, re-check credit before agreeing to make a loan. Still, it's worthwhile to obtain pre-approval at the beginning of the buying process to know how much home you can afford and to avoid the headaches and embarrassment of not qualifying for a home you have under contract.

How do you get your Mortgage Loan?

The first step is to see a lender and get a letter of pre-approval. As we have said, this pre-approval letter will be granted after the lender has run a credit report and you have provided various documents the lender requires. These include tax returns, a list of loans and credit cards you might have, as well as paycheck stubs and documents about your employment and pay and the other items in the checklist below (see Link for printable checklist).

Once you have received loan pre-approval, the loan must be processed and then be underwritten to guarantee you a loan. These are different departments within the bank, so it will take time to complete this process. The processing department must order appraisals, title work, and verify employment. The underwriter must make sure that your loan meets the requirements for the particular loan program you are using. Just so that you know, problems with loan processing can often be traced to buyers not having submitted the necessary financial items and paperwork in a timely manner- so make sure to keep on top of this or else you run the risk of losing that home.

The Mortgage Approval Process
Mortgage Application Checklist
Mortgage Loan Flowsheet
Mortgage Questions & Answers

ADDENDUM

#1.  Suggestions and Advice

When you are purchasing a home and going through the loan process, it is best not to purchase any major items including appliances, cars, or apply for credit cards or other lines of debit. Even small debt can throw off the ratios used by the lender to grant your loan, and you may suddenly find you no longer qualifying.

If you receive money and put it into your account, or if you transfer money from one account to another, it is important to keep a paper trail to explain where the money came from or where it went.

If you intend to obtain pre-approval, you should begin rounding up information that the lender will need in order to process the loan. The link below may be useful to you to compile the information.

Verification of income
• Earnings statements: W-2 forms, recent pay stubs and tax returns for the past two years;
• If you are self-employed: profit and loss statements and tax returns for current year and previous two years;
• Additional income: social security, overtime bonus, commission, interest income, veteran's benefits and so on.

Verification of your assets
• List of bank account numbers, the address of your bank branch, checking and savings account statements for the previous 2-3 months;
• List of savings bonds, stocks or investments and their approximate market values;
• Copies of titles to any motor vehicles that are paid in full.
Information about the purchase
• Copy of the ratified purchase contract;
• If you made a deposit to the seller to show that you are serious about buying the house, bring a copy of canceled deposit check on house.

Your debts
• Credit card bills for the past few billing periods;
• Other consumer debt such as car loans, furniture loans, student loans and other personal and cosigned installment loans with creditor addresses and phone numbers;
• Evidence of mortgage and/or rental payments;
• Copies of alimony or child support.

If you have no established credit history, supply the lender with canceled checks for rent, utilities and other recurring obligations to show payment history and amount of revolving debt. Also lenders may also ask you about the origin of your down payment. If money for down payment is a gift from a relative, bring to the interview a copy of gift letter and copy of gift check. The gift letter states that the money will not have to be repaid.

Having these items on hand when you visit the lender will help speed up the application process. Keep in mind that different lenders may have slightly different information requirements, so ask your lender what to bring to your initial loan interview.