Buying a home is a big decision and an important milestone in everybody’s life. It is perhaps the biggest purchase that a person will make in their lifetime. Most home buyers borrow money to buy a home. Various banks and financial institutions advertise home loans and mortgages for people with all sorts of financial backgrounds. Given the importance of financing in a home purchase, having knowledge about mortgages and how they are processed can help you immensely in your home-buying journey.
When one looks up mortgages, pre-qualification and pre-approval are two terms which are thrown around quite often. Do bear in mind that pre-qualification is not the same as pre-approval. Pre-qualification is a quick and easy way to simply explore what kind of loan amount a borrower can avail. It is an informal process in which the bank/financial institution uses basic information which you provide to come up with an estimate of how much you can spend on a house. The only information you provide the lender are the details about your assets, liabilities, and income levels. Besides providing you with a mortgage estimate, you may even get some preliminary terms and conditions. But that is where it all ends.
A mortgage pre-approval, on the other hand, is a more thorough and concrete process. It comes with an actual loan offer at the end of it all. The bank or financial institution checks not only your financial information, but also your credit quality and your employment details. Once this process is complete, you will actually receive a specific loan amount with an interest rate, and this offer is usually valid for a limited time of a few months. Going for a mortgage pre-approval is more time consuming and may require more documentation from your end. But, it has its benefits too. In many cases, the buyers will expect a seller to have a mortgage pre-approval, as they would want to see proof of financing capability before even agreeing to negotiate.
In order to get a mortgage pre-approval, you will need to show the following:
- Income – You will need to show proof of income. To establish that you have a reliable and steady source of income, you will need to submit your pay stubs for a specific time period, your bank statements, your income tax returns, W-2 statements, and any other income details such as bonus, royalty, or alimony information.
- Assets – This part has more to do with the down payment portion of the loan. The lender will want to see proof that you have enough cash reserves or other liquid assets which can be used to make the down payment. Assets could include your savings, investments in mutual funds or other asset classes or gift letters in case your family and friends are planning to gift you money to make the down payment. The gift letter is interesting and lenders ask for such documents because they are looking for an assurance that the “gift” money which you receive from your family and friends is indeed a gift and not a loan with interest payments attached to it. They need liquid and un-levered amounts which can be used to make the down payment right away.
- Credit Score – Credit quality is directly linked to the interest rate which the lender will offer you, as well as the down payment amount which the lender will want you (the borrower) to pay upfront. A person with a high credit score will get a low down payment and a low interest rate. A borrower with a low credit score will have to make a larger down payment and pay a higher interest rate on the loan installments during subsequent months. A credit score is thus very important and plays a crucial role not only in qualifying you for a loan, but also in deciding the mortgage terms under which you should be offered the home loan by the lender. If you are just starting to think about buying a house down the line but have some time to go, then try and improve your credit score as much as you can. It is only going to help you in the long run.
- Employment details – If you work for a company, then the lender may contact your employer to seek details or verify the information which you submitted. If you tend to change jobs quite often, then that may motivate the lender to contact your previous employers to find out the reasons for you changing jobs so frequently. The lender wants to see stability in your work history and is looking for assurance that you are able to hold a job for a long time. Sometimes, changing of jobs can be a good thing too, as you may be growing fast in your career. The lender will try to explore that view as well. No matter what your work trends are, your employment history will receive some scrutiny for which you must be prepared. This situation changes quite significantly if you are self-employed. In such cases, you will have to submit details and paperwork about your business, its tax returns, its HR and employee details, etc. The lender will want to establish that your business is stable and it will provide you with a reliable income stream which will service the mortgage that you are seeking to avail.
- Other paperwork – The lender may ask you for other documents like your ID, your license, your social security number, and legal documents related to bankruptcy (if any) or a divorce decree (if any). You may even be asked to submit details of additional income streams such as investment income, dividend income, or rental income. All of this additional paperwork will depend on a case-to-case basis, but you must be prepared to submit these documents when asked to do so.
After all of the above is submitted and the lender approves your file, you will get a PAL or a mortgage pre-approval letter. Once you have the PAL, it’s time to negotiate hard with the seller. It is best not to disclose the details of your pre-approved amount at the beginning, as it compromises your negotiating position. But if the seller absolutely insists, then make an offer and disclose the letter. A pre-approval gives you the power to make the offer and drive a bargain because you do not have to wait for any financing or processing. You are ready to buy the house right away. All that remains to be done is an appraisal, underwriting, and final loan approval. Holding a PAL in your hand demonstrates that you are a serious buyer with all your finances in place.
If for some reason, your mortgage pre-approval gets rejected, then approach another 3 lenders. You do not have to depend on one lender, as all of them will give you different opinions and offers/rejections. That is the beauty of this entire process. It is subjective, and you need to get the best offer that you can. You may be surprised to know that according to a recent Consumer Financial Protection Bureau report, over three-fourths of loan applicants apply to only one lender for a mortgage! You can be smarter and be part of the remaining 25% who gets multiple offers and compares the advantages and disadvantages for each mortgage offer.
While applying with multiple lenders for your home mortgage, the one thing that you need to make sure of is to apply together, at the same time. Do not wait for one lender to give you a yes/no before going to another lender. Try to ensure that all the lenders you approach perform the credit check within 45 days. As you may have read, performing multiple credit checks repeatedly does affect your credit score. However, this effect is minimal if all the credit checks are performed within 45 days. So, approach multiple lenders simultaneously and get all the credit checks done in that window.
The one situation when you really have a problem is if all the lenders you approach turn down the loan because of a certain specific reason. In such a case, you know that the problem is on your end, and it’s not really the lender’s subjectivity. Whether it’s the lender or a shortcoming on your end, your entire mortgage application process will be smooth and stress-free if you receive professional guidance along the way to overcome any challenges that stand between you and the mortgage pre-approval. Feel free to fill out the form below or call us and one of our trained professional executives will assist you with any questions or doubts that you may have about the mortgage pre-approval process.