The pre-approval process, also known as a Pre-Qualification, is a time that your mortgage professional works with you to find out what you are trying to purchase, what your goals are, and whether or not you are qualified to buy your desired home, based on only the following factors:
#1 Your Credit Rating #2 Your Income and Financial Situation #3 Your Goals (desired monthly payment, property type, etc.)
A good mortgage professional will first try to find out what your goals are: What you are looking to buy How much you are looking to spend What your expectations are. Being able to qualify for a gigantic mortgage does not always mean that you should be buying to the top of your limit. Just because you can qualify for a $4,000 a month mortgage payment does not mean it is right for you.
During the pre-approval process, your mortgage professional is going to gather some information about you. They may want to see some documentation regarding income, current funds, tax returns, or legal documents. Although not necessarily required at this stage, your mortgage professional may want to clarify some things by obtaining some documentation from you to keep all parties involved from wasting time.
Especially in the case of people who are self employed, viewing the tax returns is sometimes important. As a self employed person, much of your income might be written off to expenses. This can be great at income tax time, but can create problems when it comes to proving your income.
For the basics of a pre-approval, your mortgage professional will need to know the following
:#1 - Name, Address, Social Security numbers of all prospective borrowers.
#2 - Income information for all prospective borrowers - including : a) Last 2 years employment history b) Income, broken down by base pay and overtime if paid W-2 c) If self –employed or commission, need last 2 yrs tax returns
#3 - Information about your current assets - down payment funds (if any), money for closing costs, reserves ( money you have in savings that will not be used in the purchase). Reserves can include places like a 401k fund, stocks, bonds, money from a legal settlement, or a cash value life insurance policy. It usually does not include money under your mattress. Most of the time, down payments and reserves must be seasoned (proved to have been in your possession for at least 60 days). There are loan programs available that do not require these funds be seasoned, however. Click here to learn about 100% financing
#4 - Did any of the borrowers previously pay rent or a mortgage over the last 12 months? How much? Were all payments by check or cash? Was the landlord an individual or a management company?
#5 - Information on what type of property you are interested in ( Single or multi-family, Condominium, mobile home) and an idea of how much you think you want to pay per month for your new home.
By gathering this information, your mortgage professional can put together a good idea of what you will be able to spend on a mortgage. They will review all the above information, take a look at your credit report, and discuss with you what options you have.
Your mortgage professional will then issue a Pre-Approval letter to either you or your Realtor, outlining the details of what guidelines you can qualify for to buy a home. They can work with you and your Realtor to help negotiate the best deal possible for your purchase.
Your next steps are the way to buy your home- click here to learn the 6 steps to buying a home Note- Make sure you clarify the terms that your mortgage professional is issuing your pre-approval for. As listed above, there are many times you will qualify for more than you want to spend on a monthly mortgage payment. "Shady" mortgage people may hear you say that you only want to spend, lets say $2,000 a month on your mortgage payment. However, if they can qualify you for a $4,000 mortgage payment, they will write the pre approval based on the higher home price. You will then find yourself looking at homes that are out of your price range. This is al great until it comes time for you to make your mortgage payments. Again, just because you can afford a certain monthly payment on paper does not mean that is the right number for you to spend.
Also, please be aware that a pre approval is not an exact science for a mortgage payment. Every house has different taxes, homeowner's insurance costs, etc. Also, most interest rates change daily, so if you have pre-approval done in the beginning of one month and you sign a contract at the end of the next month, a lot may have changed in that timeframe. Listen to what your mortgage broker/banker says, and make sure to stay in communication with them every few weeks so you both know where each of you stand.
