Home loan

Mortgage pre-approval and mortgage loan checklist

Buying a home can be exciting and fun, but serious buyers should start the process in a lender’s office, not at an open house. Most sellers expect buyers to have a pre-approval letter and will be more willing to negotiate with those who prove they can secure financing.

Prospective buyers must present documents proving their assets and income, good credit, employment verification, among other documents to be pre-approved for a mortgage loan.

Key points to remember

  • Serious buyers should start the process in a lender’s office, not at an open house.
  • Most sellers expect buyers to have a pre-approval letter and will be more willing to negotiate if you do.
  • To get pre-approved, you’ll need proof of assets and income, good credit, employment verification, and other types of documents your lender may require.

Prequalification vs. Pre-approval

A mortgage prequalification can be useful in estimating how much a person can afford to spend on a home, but a pre-approval is much more valuable. This means that the lender has checked the potential buyer’s credit and verified the documentation to approve a specific loan amount (approval usually lasts for a particular period, such as 60-90 days).

Potential buyers benefit in several ways by consulting a lender and obtaining a pre-approval letter. First, they have the opportunity to discuss loan options and budgeting with the lender. Second, the lender will check the buyer’s credit and find any problems. The buyer will also learn the maximum amount they can borrow, which will help set the price range.

Final loan approval occurs when the buyer has an appraisal done and the loan is applied to a property.

Prospective buyers should be careful to assess their comfort level with a given home payment, rather than immediately aiming for the top of their spending limit.

5 things you need to get a pre-approved mortgage

Requirements for pre-approval

To get pre-approved for a mortgage, you’ll need five things: proof of assets and income, good credit, a job verification, and other types of documents your lender may need. Here’s a detailed look at what you need to know to put the information together below and be ready for the pre-approval process:

Emily Roberts {Copyright} Investopedia, 2019.


1. Proof of income

Buyers are typically required to file W-2 pay statements for the past two years, recent pay stubs showing income as well as cumulative income for the year, proof of any additional income such as alimony or bonuses , and the tax of the last two years. Return.

2. Proof of assets

The borrower needs bank statements and investment account statements to prove that they have funds for down payment and closing costs, as well as cash reserves.

The down payment, expressed as a percentage of the sale price, varies depending on the type of loan. Many loans come with an obligation for the buyer to purchase private mortgage insurance (PMI) or pay a mortgage insurance premium or financing fee, unless the buyer pays at least 20% of the price. purchase. In addition to the down payment, the pre-approval is also based on the buyer’s FICO credit score, debt-to-income ratio (DTI) and other factors, depending on the type of loan.

All loans except jumbo are within the guidelines of government sponsored companies (Fannie Mae and Freddie Mac). Some loans, such as HomeReady (Fannie Mae) and Home Possible (Freddie Mac), are designed for low- to moderate-income homebuyers or first-time buyers.

Veterans Affairs (VA) loans, which do not require a down payment, are intended for U.S. veterans, military personnel, and non-remarried spouses. A buyer who receives money from a friend or relative to help them make the down payment may need a gift letter to prove that the funds are not a loan.

3. Good credit

Most lenders require a FICO score of 620 or higher to approve a conventional loan, and some even require this score for a Federal Housing Administration loan. Lenders generally reserve the lowest interest rates for customers with a credit score of 760 or higher. FHA guidelines allow approved borrowers with a score of 580 or more to pay as little as 3.5% less.

Those with lower scores must pay a larger deposit. Lenders will often work with borrowers with low or moderately low credit scores and suggest ways to improve their credit score.

The table below shows your monthly principal and interest payment on a 30-year fixed interest rate mortgage based on a range of FICO scores for three current loan amounts. Note that on a $ 250,000 loan, a person with a FICO score in the lower range (620-639) would pay $ 1,288 per month, while a homeowner in the higher range (760-850) would only pay $ 1,062, a difference of $ 2,712 per year.

FICO Score Range

620-639

640-659

660-679

680-699

700-759

760-850

Interest rate

4.656%

4.100%

3.670%

3.456%

3.279%

3.057%

$ 350,000 loan

$ 1,804

$ 1,691

$ 1,605

$ 1,563

$ 1,529

$ 1,486

$ 250,000 loan

$ 1,288

$ 1,208

$ 1,146

$ 1,116

$ 1,092

$ 1,062

$ 150,000 loan

$ 773

$ 725

$ 688

$ 670

$ 655

$ 637

At today’s rates and over the 30 years of the $ 250,000 loan, an individual with a FICO score in the 620-639 range would pay $ 213,857 in principal and interest and an owner in the 760-850 range would pay. $ 132,216, a difference of over $ 81,000.

An interest rate tool from the Consumer Financial Protection Bureau lets you see how your credit score, loan type, home price, and down payment amount may affect your rate. The tool is updated with current interest rates twice a week.

4. Employment verification

Lenders want to ensure that they only lend to borrowers with stable employment. A lender will not only want to see a buyer’s pay stubs, but they will also likely call the employer to verify employment and salary. A lender may want to contact the previous employer if a buyer has recently changed jobs.

Independent buyers will need to provide additional important documents regarding their business and income. According to Fannie Mae, factors that go into approving a mortgage for an independent borrower include the stability of the borrower’s income, the location and nature of the borrower’s business, the demand for the product or service offered by the business, the financial strength of the business, and the ability of the business to continue to generate and distribute sufficient income to enable the borrower to make mortgage payments.

As a general rule, self-employed borrowers must file at least the last two years income tax returns with all appropriate times.

5. Other documentation

The lender will need to copy the borrower’s driver’s license and will need the borrower’s social security number and signature, allowing the lender to prepare a credit report. Be prepared during the pre-approval session and later to provide (as quickly as possible) any additional documents requested by the lender.

The more cooperative you are, the smoother the mortgage process.

The bottom line

Consulting a lender before the home buying process can save a lot of heartache later on. Gather the documents before the pre-approval appointment, and certainly before you go looking for a home.

What is the difference between prequalification and pre-approval?

Prequalification and pre-approval involve a review of an applicant’s credit report. The difference is the degree of credit review. Prequalification involves a quick credit check and only provides a potential borrower with a general idea of ​​how much mortgage they might qualify for and under what terms. Pre-approval involves a full credit assessment, although it is only offered for a limited period of time, provides the potential borrower with a strong credit offer from a lender that they can use to make offers. in good faith on homes for sale.

What factors are taken into account for pre-approval?

Lenders verify certain information about the borrower before providing a pre-approved offer. These include verification of employment, income, assets and credit rating. A full credit report and credit score are pulled at the time of application against a limited credit report (soft pull) which is often used with prequalification offers.


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