The real estate market here in the western suburbs of Boston is hot. We have more buyers than houses and that means it is especially important to put your best foot forward when you make an offer. The shopping part of the home buying process can be fun, but that process should begin with a lender and not open houses. A Pre-Approval is a process that determines whether the borrower qualifies for a loan.
“A pre-approval from a qualified and respected lender is the single most important thing you can do to put yourself in a position to make your best offer.”
First and foremost, in today’s real estate market, most sellers expect buyers to have a pre-approval, and may only negotiate with people who have proof that they can obtain financing. Buyers have an opportunity to discuss financing options and budgeting with the lender. The lender will not only give them a real understanding of their purchase power, it also allows a buyer to say (and sometimes realize) I am not comfortable borrowing (and paying back) that much money. In going through the pre-approval process, a borrower will also get a heads up if they have any credit issues and find out how they can clear up negative reporting.
You’ll find that realtors have very definitive opinions regarding lenders. One of the many advantages of working with a realtor is the relationships they have with lenders, attorneys, contractors, etc. When I see a pre-approval from certain large but nameless banks, the hair on the back of my neck stands up. In my experience, these lenders typically have trouble closing a loan on time. One late closing has a domino effect on all closings dependent upon that particular closing. If the lender closes your loan two days late, most likely the seller of the house you are buying is waiting for the funds to close on their next house. The seller of the seller’s new home can’t close and so on and so on. Late closings do jeopardize your down payment, so choose your lender wisely.
Pre-qualification Vs. Pre-approval
Although they sound alike, being pre-qualified for a loan is not the same thing as being pre-approved. A pre-qualification letter is worthless; it is a brief conversation with a lender and the information provided has not been substantiated. With a pre-approval, the lender checks your credit and verifies your financial and employment information and documentation. This not only confirms your ability to qualify for a mortgage but approves a specific loan amount (usually for a specific period, such as 90 days). Be aware that this is not a commitment.
To obtain a pre-approval, you will need to provide the following:
Proof of Income
These documents will include, but may not be limited to:
- Thirty days of pay stubs that show income as well as year-to-date income
- Two years of federal tax returns
- Quarterly statement of all asset accounts including your checking and savings, and any investment accounts
- Two years of W2 statements
Borrowers also need to be prepared with proof of any additional income such as alimony or bonuses.
You will need to show all of your bank statements, to prove you have the funds for the down payment. Some loans require cash reserves. If you receive any money as a gift to help with the down payment a gift letter to confirm that the loan does not need to be repaid will be required.
Credit scores over 740 receive the best rates available. In almost every case you will need a score of 620 to qualify for a mortgage. You can get a mortgage with a low score but will likely need to put have a larger down payment.
The lender will verify your employment. If you have recently changed jobs your employment history will be looked at closely. If you job hop; you may also have to explain this in more detail. If you are self-employed you will likely be asked for further documentation.
If your offer has been accepted and you have done inspections and signed the P&S, you are not home free. I strongly advise you not to buy any big-ticket items, even with American Express. Don’t lease or buy a car, furniture or take a fancy vacation without speaking with your lender! Also, remember that you will need 5% of the purchase price due at the P&S. The P&S is signed within 2 weeks of your accepted offer.
Reach out if you have any questions. I have worked with many banks and mortgage companies in the last 15 years and I am happy to provide you a list of my favorite lenders.