Get Pre-Qualified For A Loan
Pre-Qualify or Pre-Approved which one to I need to start the process of looking for a home? If we were in your shoes, we will be asking the same question. This section is an excellent way to become more familiar with each process with more in depth explanations that will help you decide which process is better at this point during your home loan search.
Getting pre-qualified is the initial step in the mortgage process, and it’s generally fairly simple. You supply a bank or lender with your overall financial picture, including your debt, income and assets. After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify. Pre-qualification can be done over the phone or on the internet, and there is usually no cost involved. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home.
The initial pre-qualification step allows you to discuss any goals or needs you may have regarding your mortgage with your lender. At this point, a lender can explain your various mortgage options and recommend the loan type that might be best suited to your situation.
Because it’s a quick procedure, and based only on the information you provide to the lender, your pre-qualified amount is not a sure thing; it’s just the amount for which you might expect to be approved. For this reason, a pre-qualified buyer doesn’t carry the same weight as a pre-approved buyer who has been more thoroughly investigated. You want to obtain pre-approval, not pre-qualification, before you start shopping for a house.
At the pre-qualification stage, lenders will usually give you a preliminary good faith estimate that will lists; the loan amount you might qualify for, interest rate you might qualify for and what your closing costs might be. These numbers are all estimates and, despite the name of the form, the lender can give you any numbers they want to try to get your business, so take these numbers with a healthy dose of skepticism. What you’re really trying to do here is judge different loan officers. The most important thing in choosing a lender is not choosing the one that gives you the cheapest good faith estimate, but choosing the one that seems the most trustworthy, knowledgeable and reliable and tries to give you the most realistic good faith estimate possible at this point.
Once you’ve pre-qualified with a few lenders and decided which you might prefer to work with, you’ll want to pass the underwriting test so you have a genuine pre-approval that will allow you to make an offer on a home as soon as you find one you want. All lenders will want similar paperwork from you for this process, so get it together before you apply – it may take longer to gather than you think. Here’s a list of commonly requested paperwork:
- Last two months of statements for all asset accounts (savings, retirement, brokerage, and checking if you keep a lot of money there)
- Last two years’ W-2 Forms
- Last two years’ tax returns
- Most recent month’s pay stubs (your last two pay stubs if you get paid every two weeks and your last pay stub if you get paid monthly)
- If you’re self-employed, a year-to-date profit and loss statement
- 1099s for the last two years
- Copy of driver’s license
- Copy of Social Security card
Getting pre-approved means that not only have you given the mortgage lender information on your income, assets, and liabilities, but your information has been checked and verified. The mortgage lender may also have pulled your credit report to learn about your credit history and credit-worthiness. This process is the next step, and it tends to be much more involved. You’ll complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating (your credit will be run).
Typically during this stage, you haven’t found a house yet, so any reference to “property” on the application will be left blank or to be determined (TBD). After this is done, the lender will be able to tell you the specific mortgage amount for which you are approved. You’ll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock-in a specific rate (lock-in rate). Finally, your pre-approval will come with a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you’re one step closer to obtaining an actual mortgage.
The other advantage of completing both of these steps; the pre-qualification and pre-approval before you start to look for a home is that you’ll know in advance how much you can afford. This way, you don’t waste time with guessing or looking at properties that are beyond your means. Getting pre-approved for a mortgage also enables you to move quickly when you find the perfect place. When you make an offer, it won’t be contingent on obtaining financing, which can save you valuable time. In a competitive market, this lets the seller know that your offer is serious, and could prevent you from losing out to another potential buyer who already has financing arranged.
Once you have found the right house for you, you’ll fill in the appropriate details and your pre-approval will become a complete application.
What to expect during the Pre-Approval Process
In order to get pre-approved for a mortgage, you will need to provide information for everyone who will be a borrower on the loan (for example, both you and your spouse):
- Zip Code
This tells the bank where you plan to purchase (this isn’t crucial, so don’t worry if you’re considering multiple zip codes – just pick one).
- Down Payment
This is the amount you’re putting down (as a percentage). The minimum lenders require will depend on current market conditions and the type of loan. Federal Housing Administration (FHA) loans and Veterans Affairs (VA) loans traditionally have lower down payment requirements. (To learn more about FHA Loans, read Understanding FHA Home Loans.)
- Social Security Number
The bank will use your SSN to run a credit check during the application process – this can be done instantly while you’re on the phone. The purpose of the credit check is to determine your monthly debt payments, which will affect how much additional debt the bank will let you take on for your mortgage, and to determine your credit score, which will determine what interest rate you’re eligible for (or if you’re eligible to borrow at all). The lender is required to tell you your credit score, so there’s no need for you to pay for your own credit report to get this information. If there is more than one borrower, the lowest credit score is the only one the bank will count.
- Employment Information
You will need to tell potential lenders where you work, including contact information for your current employer. The lender needs detailed employment information on all borrowers to determine whether the mortgage will be paid reliably. Your should also know the number of years you’ve worked for your current employer, your job title or line of work and the number of years in your current line of work (if your job title or line of work isn’t cut and dried, pick the one that will give you the longest track record in that field because lenders look favorably on a longer amount of time in the same line of work).
Know your base annual or monthly income before taxes if you work for someone else, after taxes if you’re self-employed (no, it’s not fair), anticipated for the current year and actual for the previous year. Also calculate your annual or monthly overtime hours. This has to be consistent for two years to count. If you made $3,000 in overtime this year and $1,500 in overtime last year, the lender will consider you to make only $1,500 in overtime, reliably, each year when considering how much home you can afford. The same reliability test applies for your annual bonus (so if you got a $2,000 bonus this year and a $0 bonus last year, as far as the bank is concerned you don’t make a bonus). The same goes for any other sources of income (such as interest and dividends).
You should research and bring estimates for homeowners’ insurance and tax rates to your lender when you are looking to get pre-approved. The lender can estimate these for you, but the lender’s estimates often will be quite inaccurate. If you’ve done your research, you can supply the lender with your own numbers.
- Net Worth
Add up how much money you have in all your accounts (one by one): retirement, savings, checking, brokerage, etc. You do not need to supply account numbers at this point. Later the bank will ask for copies of bank statements reflecting these balances.
Expect to wait at least a week to get your real pre-approval. It may take longer depending on the underwriter’s work ethic, work load and whether additional documentation is required from you. The entire loan pre-approval process, from gathering your information and paperwork to calling several lenders and passing underwriting will probably take you a bare minimum of two weeks unless you have nothing else to do. Once you have a written pre-approval letter in hand, you’re almost ready for the fun part – home shopping. But first, you must find an agent.
- Getting Committed
The final step in the process is what’s called a “loan commitment”, which is only issued by a bank when it has approved you, the borrower, and the house in question. This means the home should be appraised at or above the sales price. The bank may also require more information if the appraiser brings up anything should be investigated (for example: structural problems, accessibility issues, outstanding liens or litigation in progress). Your income and credit profile will be checked once again to ensure nothing has changed since the initial approval.
A loan commitment letter is issued only when the bank is certain it will lend, so the commitment date on your purchase contract should be closer to closing than to the date of your offer. Sellers can ask for an updated loan commitment letter if the letter is expired, beware of anyone who tries to put an early commitment date into your contract.
Be extremely cautious with Pre-Qualify and Pre-approve processes – they are not the same thing. Do not assume that the bank will provide you with a loan until you have gone through all the steps necessary during the pre-approved process. The mistake could cost you your new home! Once you have a written pre-approval letter in hand, you’re almost ready for the fun part – home shopping. But first, you must find an agent.