About once a month, a client is referred to me who is not only seeking mortgage pre-approval, but who already has an accepted offer. My surprise is twofold - first, I’m shocked to learn that they actually managed to get their offer accepted and, second, I’m shocked that they would even want their offer accepted without being pre-approved! Entering into a purchase agreement is a serious contractual obligation. As I review their contract, I can hear the clock ticking… financing contingency, 17 days… appraisal, 17 days… close of escrow… all without a clear sense of their ability to close on time or the quality of the financing they are likely to receive.
Today’s mortgage market is extremely demanding. Addressing guideline requirements to the letter –seemingly ad infinitum –can be lesson in frustration, and even borrowers with stellar credentials must do the dance. By beginning the process early, one is far more likely to get the best financing, to close on time, and to buy a home on one’s own terms. There are no benefits to shortcutting the loan pre-approval process, and among the many pitfalls are losing your 3% deposit money, along with inspection and appraisal fees.
Here, in three brief sections are reasons why you should get pre-approved before looking for a home, what you will need to get pre-approved, and a few things to be aware of as you navigate the approval process:
Why You Should Get Pre-Approved Before Looking For a Home:
- It will provide you with a clear sense of what you can afford and what your monthly payments will be.
- You can address potential problems upfront, such as income qualification, issues with credit scores, or the securing of necessary documentation so that you can get the best loan.
- It greatly improves the odds of getting the winning offer. By being in position to close quickly, your offer might get accepted, even when in competition against higher bids.
- There is less chance of the transaction falling apart and of losing your deposit money.
What Your Broker or Lender Will Need:
- 1040s & W2s, 2 most recent years.
- One month’s pay stubs.
- 2 months’ statements for all assets.
- 12 months’ rent checks (showing front & back of check).
If self-employed, etc.
- Schedule C
- If partnership, 1040s, K-1s, and 1065s.
- If corporation, 1040s, W-2s, and 1120s.
A Few Items to Be Aware of:
· Keep credit card balances lower than 33% of their respective limits.
· You should have 3 active trade lines with a 2-year history.
· Closing credit card accounts may hurt your credit.
· If you are switching from a salaried position to self-employment, you will need two years’ returns as self-employed for income to qualify.
· If switching salaried jobs, you will need to be in the same line of work.
· All funds and large deposits must be carefully documented.
Naturally, not all loan approvals are equal. The process of securing mortgage financing essentially commodifies both the borrower and the property. A serious loan approval is pretty close to the final underwriting your file will ultimately be subjected to. There are many hours of processing and general “beating-into-shape” required to satisfy the targeted investor’s guidelines. As time and effort are money, most pre-approvals shirk the necessary work until you are in contract. When seeking loan pre-approval, try to gain a sense of the work that will be done on your file so you can be confident that your future offers will be solidly backed up.
Getting a serious loan pre-approval is a fundamental first step to buying your new home. Beginning the process early can only work to your advantage and lend control as you embark on one of your most important financial commitments. And, once the work is done, your pre-approval is easily updated and maintained –even if the hunt for your new home takes a year or longer.