Before you begin looking for a new home, if you plan to seek financing, it’s smart to get pre-approved for a mortgage loan. This process will help you set a budget and know what you can afford before you begin your search. If you don’t know what you can afford, you may be looking out of your price range. To avoid a situation where you find the perfect home, only to learn later you don’t qualify for the loan you would need, consider getting pre-approved! Here are some facts about getting pre-approved that may answer some of your questions.
Some people are not aware that there is a difference between pre-qualification and pre-approval. While a mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on a home, a pre-approval is much more valuable, because it means the lender has actually checked your credit and verified your documentation to approve a specific loan amount.
To prepare for pre-approval, it is important to gather pertinent information. Here are 5 things you need to provide before attempting to obtain pre-approval for a mortgage.
1. Proof of Income
Most lenders will require documentation, including W-2 statements from the past two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses and your two most recent tax returns.
2. Proof of Assets
Bank statements and investment account statements are important to prove that you have funds for the down payment and for closing costs. An FHA loan requires a down payment of at least 3.5% of the cost of the home, and conventional homes require 10% to 20%. If you receive money from a friend or relative to assist with the down payment, you will need documentation to prove that this is not a loan.
3. Good Credit
Most lenders today reserve the lowest interest rates or customers with a credit score of 740 or above. Below that, borrowers may have a higher interest rate. FHA loan guidelines state that borrowers with a credit score below 580 are required to make a larger down payment. Most lenders require a credit score of 620 or above in order to approve an FHA loan. Lenders will often work with borrowers with a low or moderately low credit score and suggest ways they can improve their score prior to granting a home loan which can mean waiting months to years to build credit.
4. Employment Verification
Lenders today want to make sure they are loaning only to borrowers with stable employment. Because of this, your lender will want to see your pay stubs, and will most likely want to call your employer to verify. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income. However, there are local lenders who specialize in working with those who are self-employed. Ask us about this!
5. Documentation
A driver’s license and Social Security number are important to provide to prospective lenders. You will also need to authorize the lending institutuion to run your credit report with the major credit reporting agencies. In certain situations, the lender may ask for additional paperwork. So, it is important to be prepared.