Let me guess….you are a first time home buyer and you are very confused about which steps to follow when purchasing your first home!
Guess what! You are not alone! Actually, this is the first step in getting a house: Mortgage Loan Approval Process. Of course, we will not get you going with the approval first but rather with mortgage pre qualification.
What does Pre-Qualification mean?
A pre-qualification means that based on the information you verbally disclosed to a lender, they had decided that you probably will be eligible for a loan up to a certain amount. Not to get confused with “pre-approval.” A pre-qualification is a financial snapshot that gives you an idea of the mortgage you might qualify for.
What does Pre-Approval mean?
It basically means the maximum amount you can afford to spend on a home based on your credit score and all the document provided to the lender.
Which document will the lender need to get me pre-approved?
- Credit Report – they will pull your credit to check your credit score
- 2 years W-2 or 1099
- 1 month of pay stubs, which mean 4 if you get pay weekly, 2 if you get pay every other week
- Documentation on additional earnings if applicable, like alimony, child support or employment stock options
- 2 years tax return if you are self-employed
- 2 months bank statements, investment records, retirement accounts, real estate
- all your monthly expenses including alimony and child support information, credit cards, student loans, car loans,along with balances and monthly payments
- Bankruptcy discharge papers, if you have had a bankruptcy within the last several years
There is a formula you can do if you would like to have an idea of whether you’ll get pre-approved. You need to find out your DTI (debt-to-income ratio). You can calculate your ratio by dividing monthly debt payments by gross monthly income (before taxes). You can download and print this debt-to-income-worksheet to find out your own DTI ratio.
The rule of thumb for most conventional lenders is that your back-end ratio should be at 36% or lower, there are a lot of different programs out there and, the ratio might be slightly different.
Credit scores on the rise thanks to changes at credit agencies from CNBC.
With your pre-approval in hand, sellers will know you’re a serious buyer.
I Was Pre-Approved. I Got The Loan!
Well … not so fast. It does not necessarily mean that you got the loan!
There is always contingency to a pre-approval.
Subject to appraisal, which means an appraisal needs to be done and review by the lender. It is also a protection for you. Let’s say the value comes back lower than the sale contract. I don’t think you would want to buy a property overpriced, besides, at that point, your lender will lend you money based on the appraised value… Which means the difference between the appraised value and the purchase price will have to come out of your pocket on top of the original down payment and the lender will want a letter from you, saying that you are aware that you are buying a property that exceeds the appraised value.
Subject to a fully executed sale contract
Subject to additional documentation and most likely recheck your credit before closing so DO NOT buy furniture, a new car or anything else, this can cause your mortgage to get declined!
Ok, but what do pre-approved means then?
It shows sellers that you are a reliable, qualified buyer since you have a pre-approval in hands already. This gives them confidence in your offer.
Hope this has been very helpful to you! Please use the comment box for any questions you might have 😉