Pre-Qualification

You’ve decided now’s the time to buy a home. You’ve learned about the mortgage process and you know your next step is to get pre-qualified. Just how do you do that, exactly?

One of the first things that your loan officer will request is for proof of income. Here is a basic list of what this includes:

• Last 2 years of W-2 statements
• If self employed, last 2 years of tax returns
• Pay stubs for the last 30 days
• Documentation for other income: Bonuses, alimony, etc

Income is important, but your loan officer will need proof of cash set aside for all upfront costs. This typically includes funds for a downpayment, closing costs, and cash reserves.

Each loan type comes with different downpayment requirements, from as little as 1% to as much as 20%. To prove you have the assets to cover these upfront costs, provide documentation such as two months of bank and investment portfolio statements.

If you are receiving downpayment funds from friends or family, your loan officer will need proof of this. Prepare a letter stating that funds are a gift and not a loan that you will have to pay back.

The better your credit score, the better your loan options. Generally, a score of 740 or more will get you the best interest rates on offer. The low end of acceptable is 620 for most FHA loans. A good loan officer won’t tell you your number and move on. They will provide feedback about improving your profile or correcting any errors.

If you were pre-approved for a loan, your lender will provide a letter indicating how much you are able to borrow and the possible purchase price of the home. This letter in turn can be provided to the agents of home sellers to confirm you will be approved for a loan after they accept your offer. These letters are typically good for 60-90 days and it’s important to understand that pre-approval does not guarantee loan terms or rates. A lender may ultimately require additional verification or income and it may be subject to reassessment in the future.

Buying a home is much different than it was ten years ago. It was simple to get approved for a loan and lenders were comfortable taking risks. Then the housing bubble burst and the application process got a little harder.

Sellers and listing agents are adjusting to this change. With stricter rules, they’re unable to jump into a sale with the first person to make an offer. They size up buyers, looking for one able to complete the sale and receive financing.

When a buyer makes an offer that has not yet been approved for a mortgage, everyone loses. Not all buyers will be approved, so there is massive incentive for sellers to select a pre-qualifed buyer. This pre-qualification tells a seller that their financials have been checked and are in order.

Home sellers and their agents want to work with pre-qualified buyers, which means that you will need to be pre-qualified to succeed. You do not want to miss out on your ideal home by showing up without a pre-qualification letter. If you’re serious, make it known and provide proof of financing.

The dollar amount listed on your pre-qualification letter is usually the maximum that you can afford. Thus, your best bet is to look for homes priced equal to or less than that amount. If homes in your area sell quickly or get multiple offers, look for slightly cheaper homes that allow room to haggle or raise your offer as needed.

Start shopping immediately following your pre-qualification, as your letter is likely valid for only 60-90 days.