Today’s real estate market can be competitive for everyone, no matter what price point you’re shopping at. That’s why it’s important to understand the ins and outs of the home buying process before you hit the market. Let’s talk about what getting a mortgage pre-approval letter involves, how you can do so, and why it’s a good idea for anyone heading into the market for a new home.
Reasons to Seek Pre-Qualification for Mortgages
Before seeking any kind of letter from a mortgage company showing you are ready for the market, the first step is to make sure you do qualify for a mortgage. This initial step is important, because it lets you know whether your expectation for a budget is realistic, whether your credit is ready, and so forth. It allows you to make sure you’re shopping in the right price range, without submitting all the paperwork you would need to finalize the process and get your letter showing you’ve been pre-approved.
A few key items you need to make it through this phase are:
- Verbal discussion of income
- Verbal discussion of assets
- Satisfactory credit throughout the process
Documents Needed for a Full Pre-Approval Letter
When you want to move from pre-qualification to being pre-approved, you need to verify your exact financial information. That means you want to make sure you have the right documents for each important category above. Pre-qualification can be done with rough numbers but getting pre-approved involves taking all the application steps short of appraising and inspecting an actual home. For each of those five categories, here are the key items you should include in your application materials.
- Proof of Income
For W-2 wage earners, proof of income is easily obtained through recent pay stubs and the last two years’ W2’s. Those who are self-employed or own their own businesses may require more:
- Two prior years’ tax returns
- Profit & Loss statement for the current year
These documents allow the bank to verify that your income is what you say it is.
- Proof of Assets
Proof of your assets, including bank records showing full account numbers and balances, and brokerage statements outlining your investment holdings are all important. This also includes documentation of retirement savings like your 401k benefits statement or your IRA earnings statement for the last two months or the latest quarter. These demonstrate where your down payment funds are coming from and if you have cash reserves.
- Satisfactory Credit
Mortgage lenders may give better rates to people with higher credit scores, depending on the loan program you are applying for. And there may be higher interest rates charged for lower credit scores, depending on the loan program you are applying for.
While there’s no guaranteed way to get your credit score to rise to a certain level, keeping all your accounts current and maintaining credit card balances less than 30 percent of your credit card limit are important.
- Verification of Liabilities and Debt Ratios
Mortgage lenders pull a credit report to not only verify your credit score, but also to verify the amount of your liabilities that factor in your debt ratios. They look for your monthly payments as well as account balances. In some instances if an installment loan has less than 10 monthly payments left a lender may not count it against your debt ratios.
- Employment Verification
If you’re a regular wage-earner with W-2 income, your two most recent pay stubs and the last two years’ W2’s will help verify your income. If you are self-employed the last two years’ tax returns and a profit and loss statement for the current year are needed. As a self-employed person you may even need to verify the status of long-term contracts by obtaining letters indicating your relationship is in good standing and your services will be needed by clients for the foreseeable future. It depends a lot on the nature of your business.
Advantages of Clearing the Hurdles and Getting Pre-Approved
There are a few concrete advantages you are able to count on when you go into the market with a pre-approval letter. For starters, the homebuying process will be mostly complete when you make your offer. There are still steps to take to protect your investment and get full approval for a mortgage, like appraisals, inspections, homeowners insurance and a title search, but your bank’s decisions about your ability to pay up to a certain amount will be ironed out already.
That’s not the only advantage, though. Sellers tend to take buyers more seriously when they come with letters showing they have a mortgage lined up through a mortgage lender that knows they are ready to buy. It demonstrates the ability to close more quickly and with confidence, making it easier for sellers to make a deal with you.
Realtors are also more confident showing homes to buyers who have pre-approval. Some buyers wonder whether a letter is required to see homes. The fact is that it is not, as explained in this breakdown by Realtor.com. That doesn’t mean your realtor will automatically show a place to you if you don’t make a specific request, though. For more information about getting yourself pre-approved, check out this resource.