It's no secret that pre-approval is the first step in homebuying, but the some first-time homebuyers are apprehensive of the process. As you're looking to get a pre-approval from a mortgage lender, refer to these tips for confidence when starting your homebuying journey.
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Understand the Pre-Approval Process
In order to be approved for a loan, you lender must verify various aspects of your finances and of the home you choose to purchase. Typically, this process begins with a pre-approval.
To get a pre-approval, your lender will run your credit score and compile a loan application with the information you provide regarding income, employment history, assets, etc. The lender will analyze this information and issue a decision on whether or not you are eligible for a loan. If you are qualified, the lender will issue a pre-approval that states your qualification subject to verification of the information you provided and the purchase property.
A loan commitment takes pre-approval a step further by verifying all of your financial information. A loan commitment provides information about the loan your lender has agree to provide you, indicating the amount of money being loan, the interest rate you are qualified for, type of loan and period of time for which the commitment is good.
Though shopping for a home with a pre-approval is better than shopping without, a loan commitment gives homebuyers a consistent head start against other buyers.
Gather Your Paperwork
Once your pre-approval is compiled, your lender will ask for various documents that support the information you provided regarding employment, assets, finances, etc. To keep your loan application process moving forward in a timely manner, it's a good idea to have these documents located and ready to go for your lender to finish compiling your loan application. Documents needed include:
- Last two years W-2's and federal tax returns
- Last 30 days paystubs
- Last two months bank statements for all financial accounts (investments included)
- Loan payment information
- Two-year residency history
For a more extensive list of documents, check out our loan application checklist.
Know Your Credit Circumstance
The majority of homebuyers, 95 percent, know that credit is important when purchasing a home, according to an Experian survey. Furthermore, people who know their credit scores feel significantly more prepared to buy a home than those who don't know their credit score (70% vs. 54%).
You can check your own credit report once a year with each of the 3 major credit bureaus, TransUnion, Experian and Equifax. Keeping a close eye on your credit report (though it won't contain you credit score) can help you look out for errors, collections, etc. If you have recently applied for any type of credit in which the creditor or lender ran your credit score, you can ask to see your report.
Be wary of online credit score checks, though. They often only contain one of your credit scores from the 3 major credit bureaus, which can misguide you to believe your score is higher or lower than it actually is.
Keep Your Finances As-Is
Let's say your get a copy of your credit report and find that you had an old, forgotten account sent to collections. While immediately paying that collection off may seem like the responsible thing to do, it brings that negative credit mark current and could drop your score signficantly.
It's important to leave the timing of credit decisions, like paying off collections, to your mortgage lender. Wait until your pre-approval to discuss options going forward in regards to paying off accounts in collections or opening up new lines of credit.
Avoid Making Large Credit Purchases
A large purchase on a credit line can drop your credit score significantly as it ties up your available credit. A drop in score can dictate your eligibility for a home loan.
A major purchase can also affect your debt-to-income ratio, which is taken into account when determining if and how much a lender can pre-approve you for. Avoid making any large purchases before and during the loan application process, unless you have consulted with your mortgage banker first.
Document Cash Deposits
Maybe you just got married and deposited gift checks into your account or did some freelance work and got paid in cash; regardless, keep track of personal check and cash deposits in your bank account. When your lender looks at your bank statements, they will need to verify where and who funds came from. Keeping receipts and records of these transactions will keep you from having to backtrack.
Purchasing a home is a big decision, so it's important to be as prepared as possible. If you have any questions about the pre-approval process, contact one of our mortgage bankers.
For more information about buying your first home, download our free Mortgage 101 Handbook.