On Real Estate & More – November 2021

Getting preapproved for a mortgage is an important first step in the process of buying a home, especially in a competitive real estate market like we are currently experiencing. It gives you an idea of how much you can borrow, which helps narrow down your search to houses in your price range. The preapproval process might also uncover issues that may prevent you from getting a mortgage, so you can work those issues out before making an offer on a house. From the seller’s perspective, a preapproval letter from a reputable local lender often can make the difference between accepting and rejecting an offer. Because most of your information is in the lender’s system, a mortgage pre-approval helps the loan process go faster once you make an offer.

Buyers shouldn’t confuse mortgage preapproval with pre-qualification. A buyer who becomes “pre-qualified” hasn’t actually accomplished much. This process typically only involves a conversation or a credit score review. Since pre-qualification doesn’t verify financial data, identify red flags or address potential issues, it won’t improve a buyer’s standing with the seller’s team. Buyers have more to gain from focusing on preapproval, which will take more time, but actually impacts the purchase effort.

Fortunately, getting preapproved is relatively simple. To get preapproved, lenders will want to verify your identity, credit history, employment history, income and financial assets. They’ll likely ask you to fill out a loan application which asks for information such as:

  • Identification, including driver’s license or passport, Social Security number
  • Credit history—your lender will check your credit score
  • Information about property you own
  • Employment verification. Your lender wants to know you have stable employment.
  • Debts you owe or other liabilities
  • Income verification, including: recent pay stubs covering the last 30 days; W-2 forms from the last two years; proof of any additional income; last two years of personal federal income tax returns with all pages and schedules; and last two years of business federal income tax returns with all pages and schedules.
  • Assets, including: bank statements that prove you have enough to cover the down payment and closing costs; If someone is helping you with the down payment, you will need a gift letter stating that the fund is a gift and not an IOU; Last quarterly statements for asset accounts, including your 401(k), IRA, stock accounts, and mutual funds.

Your lender will also likely do a hard credit inquiry and may require additional documentation, especially if you’re self-employed or your income comes from several sources.

For almost any potential home buyer, the preapproval process offers substantial benefits. From a transaction standpoint, a lender’s support can strengthen any purchase offer that the buyer submits. And, for a buyer’s personal finances, the steps involved in preapproval can help a buyer to better grasp the implications of various payment amounts—both up front and on an ongoing monthly basis.

These preapproval benefits, however, come with some important conditions that buyers will want to note. The personal financial circumstances that form the basis for a lender’s willingness to extend a mortgage to a buyer can change over time. As a result, mortgage preapprovals will expire after a certain time period, typically around 90 days.

If the buyer hasn’t gone under contract at that point, a lender will need to run through the preapproval checklist again, using updated financial data as necessary. For these reasons, the preapproval doesn’t guarantee a loan or any particular terms. The mortgage that the lender ultimately extends will depend on the exact conditions at the time the buyer needs the funds.

Changing jobs, opening new accounts or lines of credit or moving around significant amounts of money can create uncertainty about the buyer’s financial standing. As a general rule of thumb, don’t make any big changes to your finances in between getting your mortgage pre-approval and buying your new home. Making another major purchase or taking on alternate debt will likely invalidate your existing pre-approval amount and require you to start over.

Consulting with a lender before the home buying process can save a lot of heartache later and prepare you to start house hunting.