Simple Guide to a Loan Pre-Approval
Before searching for a house, it is crucial to get pre-approved for a mortgage. Obtaining pre-approval from a lender will provide you with the maximum loan amount and the terms under which your loan would fall. This process can be a confusing one, so it is best to prepare before starting.
What is a Pre-Approval?
A pre-approval is an evaluation of a borrower to determine how much money the borrower’s loan would qualify for. Through the process, lenders will mainly look at four key factors:
1. Credit History/Credit Score: Lenders will look at your credit reports from the three main credit bureaus (Equifax, Experian, and Transunion), payment history, type of credit lines opened, and how long those credit lines have been opened.
2. Debt-to-Income Ratio (DTI): A percentage of all your monthly debts (car loan, student loan, lines of credit, etc.) and your monthly income. Generally, borrowers should maintain a DTI of 43% or less. Having a low ratio can help you qualify for better loan terms.
3. Employment and Income History: Lenders will also want to ensure that you have a good income and a stable job. They want to make sure you can handle the mortgage payments. They will also look at bank statements to ensure you have enough money for closing costs and the down payment.
4. Assets & Liabilities: Lenders will also look at all of your assets and liabilities you hold, to ensure you have the cash for the down payment and closing cost.
The Mortgage Application
The very first step to getting pre-approved is filling out a mortgage application. The application generally is made up of eight different sections, can vary from lender to lender, but these sections are uniform.
1. Loan Type and Terms: This will outline what type of loan you are applying for and the terms for that loan, such as amount, time to repay, and the interest rate.
2. Information on Property and Purpose of Loan.
3. Information of Borrower
4. Employment Information
5. List of Monthly Income and Housing Expense Information
6. Assets and Liabilities
7. Transaction Details: Will detail purchase price, loan amount, closing cost, discounts, mortgage insurance (usually needed if paying less than 20% down payment).
8. Declarations: List of any liens, delinquent debts, bankruptcies, foreclosures, and pending lawsuits.
After completion of the application and review by the lender, you will receive a document outlining all the terms and features of your loan, along with the amount, interest rate, cost to close, and estimated taxes.
It is important to have these documents ready for review to get pre-approved or even secure a final loan.
· 60 days of bank statements and 30 days of paystubs
· Schedule K-1 (Form 1065) for Self-Employed
· W-2 Tax returns from the last 2 years
· Income Tax Returns
· Asset Account Statements
· Driver’s License or Passport
· Divorce papers of needed
· Gift letter if funding down payments with a financial gift.
Now that you have gotten pre-approved for a loan, you are ready to shop for your dream home. It is important to note that just because you received a pre-approval from a lender, you are not required to work with that lender. It is advised to shop around for a loan and go with the lender that can give you the best terms and service. Moreover, pre-approval letters are usually only valid for 60-90 days, so plan when you are ready to shop for a home.
Let's get that pre-approved and start the buying journey!