Although a pre-approval letter for a mortgage doesn’t guarantee you a loan, it’s a sure good start to know that you are doing the right thing in the scheme of buying a house.
“Currently in our housing market, you have competing offers going into the purchase of a home. If you are pre-approved and have all your ducks in a row and financing in place, you have a better chance of the seller picking you,” says Holly Schneidewind, president of Eagle Mortgage Inc. in Omaha. “With the real estate agents I work with, a lot of them won’t work with a client until they know they have been pre-approved. They won’t even show a house until you have the letter.”
The agents don’t want to waste their time or gas for a person that hasn’t already gone through the process, she adds.
When you do write an offer, that pre-approval can be attached with the earnest money to let the seller know you are serious and your lender is giving their opinion that you will be approved for a loan for a certain amount.
Getting a pre-approval for a mortgage loan can not only help you in your quest to buy a house you can truly afford, it also can show you if there are any problems that you may need to fix in your credit report ahead of time before you apply for the actual loan.
Some of Schneidewind’s clients come to her pre-planning for a whole year in advance before they start looking for homes. They want to know what they need to save, what will their payments look like and how does all this play out.
Some clients want to look at homes first because they know they have great credit. Then there are others who just don’t have a clue.
The reason sellers want the pre-approval is that it lets the selling process go smoother, and faster, usually. Most lenders do not charge for a pre-approval, Schneidewind says.
“This is a service provided by us lender. I have heard of lenders charging for it or putting the charge on the bill once they head to the closing. But we are spending our own money and time to help earn someone’s business,” she explains.
To get a pre-approval letter, you first need to have a verbal conversation with the lender. Don’t just go online and fill out the pre-approval application, she says. Talk with the originator. Ask all the things that they need and talk about the loan itself.
“Nine out of 10 times there are errors on an online application. People don’t know how to complete a question,” she says.
Here are the four most important things you need to get that pre-approval for a mortgage:
Proof of income
All borrowers need to be prepared with tax returns and W-2 statements from the past two years.
“They have lightened up a little bit and sometimes, they only want one year of the most recent tax return, or two years depending on the someone’s scenario,” Schneidewind says. “If you are self-employed, they want the two most recent tax returns, and the most recent Profit Loss documentation.”
This all depends on the type of loan, she says. But lenders are looking for a credit score of 620 or higher for government loans. For conventional loans, a minimum of 620 can be used with a bigger down payment.
“Interest rates are still pretty good, and if you don’t have 20 percent down, the private mortgage insurance is the same if you have a 740 or a 620 credit score,” she says. She does work with her clients though to give them ideas on how to get the credit score up.
“I work with them a lot on their revolving credit accounts. If they can get those balances under 30 to 50 percent of the limit, people’s credit scores will pop up,” Schneidewind says.
Your banking accounts can help get you a mortgage preapproval especially if you have a lower credit score. You need cash to close, and in many loans, you need cash for a down payment.
So, the lender wants to see that you have cash available and that it has been in there awhile.
Some of the other things you will need to give the lender include the last two months of your bank statements of savings and checking; driver’s license; Social Security card; 401k or Social Security award letter; and W-2s or 1099s.
Schneidewind says that some clients want their preapproval so quickly, that they don’t get all the paperwork to her in time. All she had time to do was check their credit score.
“They fill out the application, and I import the information I have. I write up the preapproval letter but it will list the things I haven’t seen yet. If the realtor understands that the preapproval is contingent on getting the other stuff to the lender, then it works,” she says.