A preliminary mortgage approval is a fundamental step in the home buying process. Real estate agents as well as sellers usually require proof of a buyer’s ability to get a mortgage and make offers for a house.
As the U.S. economy has steadily recovered from the recession, many people are searching to buy a house after years of renting or being stuck in a former smaller house. As a result, the real estate market has become more competitive; requiring buyers to make quick and aggressive bids. Consequently you will need to be pre-approved for a mortgage before starting to shop for real estate.
A mortgage pre-approval will also allow you to be more realistic about what you can afford. Most of us, when buying a home, will need to borrow money to finance the purchase. So before you go any further, it would be a great idea to check with your mortgage lender how much you can borrow and obtain a pre-approval letter.
Why Should You Get a Mortgage Pre-Approval?
- Understand your costs up front – By getting a mortgage pre-approval, you will better comprehend what are the upfront costs you should expect when buying a property,
- Determine a realist price range that is also comfortable for you – going through the mortgage pre-approval process can give you a pretty good estimation of how much you can afford to spend on your home
- Correct Potential Credit Problems – You will obtain both your credit score and your credit history report. A mortgage pre-approval is a very good way to find any potential issues with your credit and removing any errors from the report.
- Determine your mortgage budget- You will be able to estimate the monthly mortgage payment related to your maximum purchase price
- Quicker closing times – A pre-approved buyer could close quicker than a buyer who has not gone through this process.
The documents to get pre-approved are the same documents that you would need to get a mortgage During the pre-approval process the mortgage lender gathers all the information it requires to offer you a loan. Your credit report will be checked and a fee might be charged during your appointment. The documents required in order to get pre-approved are exactly the same documents that you would need to get a mortgage.
You will be asked to provide the following documents:
- Bank account information – The mortgage lender wants to ensure you have sufficient funds for your closing costs or down payment. Therefore they will ask for a copy of your most recent bank statements (including your daily checking account, money market, savings or other accounts you might have)
- Proof of employment. Your mortgage lender will most likely ask you to provide a list of employers for the past two years or even more
- Self-employment documents. In case you are not employed and you run your own business. You might be asked to provide the following documents: balance sheets, a profit-and-loss statement and the last federal tax statement
- Proof of income. These mortgage documents are used to validate your income. This can be proved by providing the most recent month’s pay stub(s) from your job or through or the electronic equivalent that states your up-to-date earnings or a notice of assessment if you are self employed
- Tax documents – Most lenders want to see your last two W-2 (or the entire tax return in case you are self-employed)
- Credit information. Documents related to any other outstanding loans that you are repaying
- Gift letters. – This document will be requested only if your family is going to help you with your down payment
- Proof of IRAs or retirement accounts and their current balances
- Ditto for any stocks or mutual funds you own outside of retirement accounts
- Your driver’s license – This document is requested as your mortgage lender has to validate your identity, and also to pull your credit report
Potential buyers benefit in several ways by consulting with a lender and obtaining a pre-approval letter. Getting pre-approved allows you to lock in your rate for 120 to 160 days. This means that your mortgage lender guarantees that the rate you are offered will not change while you’re shopping for a home.