The Best Explanation Of Mortgage Pre Approval I've Ever Heard
For many buyers the mortgage pre-approval process can be a little scary. Often buyers do not know where they are at financially and applying for a mortgage will reveal their financial health. In a sense, mortgage pre-approval can be compared to going to a doctor and getting a physical for the first time in a few years - you feel great, but question whether your health is really as good as you think it is. You begin to think about all those ‘what if’ questions: ‘what is my credit going to look like?’, ‘Do I make enough money… do I have too many debts?’ or ‘Will my down payment be enough?’ It is for these reasons some buyers are hesitant about getting the pre-approval process started. Don’t worry! We have all been there. The pre-approval process is the first step in knowing the unknowns and feeling confident in your future home search.
The Four Pillars of a Mortgage
The mortgage pre-approval process really starts when a lender reviews what I call, “The Four Pillars of a Mortgage”, which are: credit, income, assets, and the property that is being purchased.
Credit - This helps determine a borrower’s ability to repay the debt by detailing the borrower’s monthly debt obligations.
Income - The amount of money that a borrower earns monthly prior to taxes. There are several different types of income and specific rules for calculating each type.
Assets - There are two types of assets, liquid and non-liquid. Liquid assets are generally used for funds to close. Examples include savings and checking accounts, stocks and bonds, and some retirement accounts or life insurance policies that offer cash value. Non-liquid assets include real estate, cars, and businesses that are owned by the borrower.
Property - The subject property that is going to be used for collateral on the mortgage. The property is given a value through an appraisal.
Before you start your home search it is critical that you consult with a lender. Think of the lender as the foundation supporting the four pillars.
When Should I Start the Pre-Approval Process?
Before you even start looking at homes you need to speak with a lender. The home buying process can be an emotional rollercoaster, especially when a person starts looking for a home before they know what they qualify for. Having an experienced lender by your side can give you a leg up in the pre-approval and home buying process.
There is a lot to consider before a buyer should really start looking at homes, such as having a budget in place, making sure you have 3-6 months reserves to cover unexpected home repairs, having enough money set aside for a down payment, and making sure your credit is in order. This is why it is so important to speak with a lender first because he or she will be able to provide a blueprint specific to the buyer’s financial situation to make sure they are setup for success along with being given realistic expectations about what they can afford.
In fact, I encourage anyone that is looking to purchase within the next 6 to 12 months to start the pre-approval process as this will put any buyer in a stronger position when purchasing a home. Why you might ask? So many people mis-utilize credit, specifically, credit cards. Many consumers are misinformed regarding how credit cards should be used. For example, did you know charging more than 30% of the available credit limit can drop your credit score? Yes, it’s true. So that means if you are given a credit limit of $1,000 you shouldn’t be charging more than $300 if you don’t want a negative impact on your credit score. Many cardholders think it’s all about making on time payments, which yes, making payments on time is important but there are other factors, such as how well the consumer is managing the line of credit given to them. Starting the process early can alert you to potential problems, help you plan to save more money, determine whether or not you need to pay off debt to lower your debt-to-income ratio, or resolve inaccuracies on your credit report.
What is a Pre-Qualification Letter VS a Pre-Approval Letter?
A pre-approval letter is always better than a pre-qualification letter.
A pre-qualification letter is an informal process based on unverified information that a buyer has provided to the lender about assets, income, and liabilities. The lender then estimates how much money a buyer can borrow based on verbal information only, nothing is verified. The lender will not formally agree to approve the mortgage for the amount the buyer is pre-qualified to borrow, only providing the buyer with a general idea of how much the lender would be willing to provide if everything checks out.
The pre-approval letter is the formal process. The lender will collect needed documentation to verify the buyer can actually qualify for the mortgage. With a pre-approval letter in hand, this strengthens the buyer’s position to make an offer because the seller is given the confidence that the lender has reviewed the buyer’s financial documentation and is legitimately verified. Once documentation is provided to the lender, a buyer can be pre-approved within 24 hours or within the same day in some cases. The pre-approval letter is typically good for 90 days after the lender has issued it.
What Documentation is Needed to Get Pre-Approved?
Providing documents to the lender to get your pre-approval letter issued couldn’t be easier these days with the digital platforms everyone has access to. Here is a list of the most common documentation needed in order for a lender to get you pre-approved for a mortgage:
Last two years of W-2’s and federal tax returns
Thirty days of current paystubs for all borrowers
Valid driver’s license or State ID (i.e. not expired)
Two months of asset statements (checking/saving accounts, IRA, 401K, etc.)
VA Loans – must provide DD-214
If you have a previous bankruptcy within the last 7 years – copy of bankruptcy filing, along with discharge filing
If child support applies – copy of court order and payment history, copy of divorce decree if that applies
Gift Letter – if a family member is providing a gift towards down payment and closing costs.
The Next Step to Get Pre-Approved
Lenders now offer online platforms that allow the borrower to have their own personal online profile for their mortgage, upload needed documents to the lender, and review and sign the mortgage application. In most cases, lenders also offer financial tools to calculate a monthly payment or figure out how much money is needed to bring to closing, all with the click of a button.
If you’re thinking about purchasing a home within the next 12 months, please give me a call or you can create an online profile by clicking on “Get Started”. I will help you make sure you are in the best position when it comes to your new home purchase. The consultation is free, the pre-approval process is free, and it is super easy to get started.
Chris Dennison | Loan Officer
Mortgage 1 | Grand Rapids Branch
3243 East Paris Ave SE | Kentwood, MI 49512
tel (616) 575-9820 | mobile (616) 802-8389 | fax (616) 957-2306
Servicing the Community for Over Two Decades
NMLS: #850828 | Company NMLS #129386