- Being pre-qualified is NOT the same thing as pre-approved
- Home buying starts in the lender’s office
- There are ways to improve your chances of approval
- Reliable pre-approvals take longer than an hour
Pre-approval: Your First Step to the American Dream
Alexander Graham Bell once said, “Before anything else, preparation is the key to success.” Buying a home is a huge undertaking; and preparation and information to make a successful investment. That preparation starts with getting pre-approved for a mortgage loan…and a pre-approval meeting with a mortgage lender is a great way to begin the process.
Notice I didn’t say pre-qualified. Though some will often interchange the two terms, they are drastically different. Pre-qualification gives you an idea of how much you may be approved for, but doesn’t necessarily guarantee anything. A pre-qualification can take place over the phone or the internet, and only considers your overall financial picture, like debt, income, and assets.
However, it does NOT analyze your credit report, nor does it take an in-depth look at your ability to purchase a home. While it gives your lender a better idea of what mortgage options to pursue for your specific goals, a pre-qualified buyer isn’t taken as seriously as a pre-approved buyer.
Pre-approval is much more involved and detailed, and requires completion of a mortgage application, absent an address. The pre-approval process includes an extensive investigation into your financial background and current credit rating. When complete, the lender can give you a specific mortgage amount for which you are approved, as well as the interest rate for that loan.
It also lets the seller know that you’re serious about buying. Even better, it sets payment thresholds…probably the most important part.
Working with your lender
Detailed paperwork goes into the pre-approval process and your lender can help keep everything in order. Some documents you might need include, but may not be limited to:
- Thirty (30) days of pay stubs showing current and year-to-date income
- Two (2) years of federal tax returns
- Sixty (60) days or a quarterly statement of all asset accounts, including checking, savings, and investment accounts
- Two (2) years of W-2 statements
Bank statements and investment statements prove you have the necessary capital for a down payment and closing costs (i.e. funds to close). A family member may also provide a financial gift, and there are special rules for this. If a family member or friend gives you a gift of money to help with the down payment, you’ll also need a notarized gift letter to certify that you aren’t obligated to pay them back.
Additionally, your lender may call your employer to verify you’re still employed with the company. Even if you’ve changed jobs, your lender may call your previous employer. Verifications of Employment (VOE) are quite helpful when establishing qualifying income.
Expect to provide additional info about your business and income if self-employed.
Take steps to optimize your credit
Credit scores of 740 or better will get you the lowest interest rates available. Even if you’re applying for an FHA 203k loan, your entire credit profile is considered to qualify.
If you’re not in the ballpark, here are some ways you can improve your score:
- Pay your bills on time – That goes for credit cards, mortgages, and other expenses. Top-end credit scores typically show no late payments in the last seven years.
- Increase your available credit – Your debt to credit ratio makes up nearly a third of your credit score. The more of your available credit that you use, the lower your credit score. Perfect scores use 10% or less of available credit.
- Keep tabs on your score – Consumers are entitled to at least one free credit report each year from one of the three major bureaus. Take advantage of that! Go through your report with a fine-tooth comb and be on the lookout for any errors, such as inaccurate credit limits or delinquencies. And personally looking at your credit score will NOT negatively impact your score – it’s an old wives’ tale, so don’t believe it.
- Use credit cards responsibly – Try to keep the bulk of your spending on one, and make little charges every few months with the others…then pay them off immediately. Credit card companies will close accounts that are inactive for too long.
- Be patient – Improving your credit score will not happen overnight. Consider this: surpassing a score of 800 can take a decade of positive account history coupled with proper management/usage.
All good things in time
Traditionally, the pre-approval process can take anywhere from a couple days to a few weeks. That said, any reasonable person could recognize the benefit of the online mortgage solutions that boast pre-qualification in minutes.
However, the major drawback of an online mortgage lending process is that it’s a completely DIY process. A professional lender has the experience, knowledge, and insight to ensure you apply for the best loan for your situation, and to help guide you through the process. There are so many options available to qualified applicants, and unless you have the knowledge you are likely missing out.
Setting up a pre-approval meeting with a lender makes sense because it won’t cost you anything more than your time. While it can be tempting to jump right into browsing the internet and your community for available houses, the knowledge you gain from meeting with a lender makes it the best first step toward a successful investment.
Be Smart…Buy Right