Do I need a Mortgage Pre-Approval Letter?
Buying a Home is Tricky Business in today’s market. It’s no longer safe to assume that you have enough money to buy a home and will qualify for the payments. When it’s time to start thinking about that big purchase it’s best to do some research and reach out to a Mortgage Professional for advice and details. Let’s address 3 issues to help guide the average consumer through the process.
#1 Do you even need a pre-approval letter?
The answer here is emphatically, “YES!” , you need to make sure you can get approved for a home loan before you go out and set your heart on that perfect property. Nothing is worse than finding something you really want and then being told that you can’t have it. A Pre-approval letter will also let realtors know that you are serious and that they aren’t wasting their time showing you homes. You’ve already shown some initiative and looked into the financing of your home so any agent will be more inclined to spend that extra time looking for your dream home to show you. The process of actually obtaining the letter will give you some insight into the mortgage approval process and give you an idea of monthly payments and how much to expect to pay out of pocket. Being prepared for a transaction like this will take time and there are many things that can derail a mortgage application so find out what might be a red flag at the time of pre-approval and you’ll save yourself last minute headaches and possibly wasted money. Finally, a pre-approval letter will save you time when it’s important. Once your offer is accepted, you’ll have a specific amount of time to provide loan approval to the sellers. If you miss that date, you could lose any earnest money you put down on the property, which could be anywhere from $500 to $5000 pretty easily.
#2 What is a good pre-approval worth?
A good Pre-approval will save you time and lots of frustration down the road. An ounce of prevention is worth a pound of cure. Selling agents know what Pre-approval letters come across their desks and they know if they see a name of a lender and it consistently closes or if their loans consistently fall through. If you have a good Pre-approval letter it will make your offer look stronger and more likely to be accepted. The final decision to accept an offer is with a homeowner, but most homeowners rely heavily on their real estate agent’s advice. A good Pre-approval letter could mean the difference between getting your offer accepted or losing the house. In order to get a solid Pre-approval letter, it’s important to be as open and forthright with your Mortgage Banker as possible. It’s perfectly OK to ask lots and lots of questions! Your Loan Officer has written hundreds of loans and talked to even more customers so if they go too fast, it’s only because they do this every day. Your banker should ask to see your documentation and should ask to pull a credit report, if they just take your word for the income, assets or credit it’s not good enough. There are so many issues that could be avoided by simply seeing the documents up front. Be prepared to provide 2 years of federal tax returns, 2 months of bank statements, 2 recent paystubs, 2 years of 1099’s or W2’s, lease agreements, Divorce Decrees, Award Letters, Business Tax Returns and just about anything else related to income or assets. The bank is thinking about lending you a significant amount of money and they will want to research your financial history thoroughly in order to determine whether or not to approve your loan and at what rate.
#3 Common Pitfalls
The documents will reveal issues that your Loan Officer should be familiar with. They typically fall into 1 of 4 categories, Income, Credit, Assets or Property.
INCOME- Are you commission based? This could be an issue if your income recently increased or if you recently went to a commission structure. This could also be an issue if you write off lots of business-related expenses on your tax returns. Do you rely on Over-Time or Bonus income? Those types of income can often be used, but not always. Is your income increasing? Sometimes this income is averaged over 2 years. Is your income decreasing? Usually, lenders will qualify you with the lower income level even if it was because of a 1-time occurrence like the birth of a child.
ASSETS- Make sure you have enough money in your bank account for the down payment and the closing costs. As early as possible get those funds into a savings account and try not to transfer money around. The underwriters in today’s market are required to track the paper trail for the source of money used as a down payment for at least 2 months and often 3 months. Don’t expect to be able to use the cash in your safe as a down payment and it would be tough to use the funds from selling your 1989 Jose Canseco baseball card on Craigslist. If you have money like this that’s cash on hand, deposit it to the bank quickly and let it “season” for at least 2 months before calling the bank. If underwriters see large deposits, they are required to inquire about it so once you put the money in the account try not to add or subtract to it. I’ve seen clients deposit money from Wedding Cards and from Gifts from Family and from Personal Loans and all files became issues. Also, in today’s market do not submit a bank statement that shows a bounced check on it, (NSF), that’s a red flag for many lenders today and could cause your file to be declined.
CREDIT- The biggest mistake here is another large purchase. Don’t buy a car while you have a pending mortgage application. Don’t buy new furniture, don’t start charging appliances on that visa card or American Express. Those credit scores are delicate, try not to have any activity out of the norm on your credit usage. The information on your credit report will also impact your “Debt to Income” (DTI) ratio, which is basically how much your bills are compared to how much you make. If your Visa Card bill jumps from $30 to $130 in one month that’s $100 taken away from your housing allowance.
PROPERTY- A Pre-approval Letter will estimate your taxes and insurance based on the zip code you are shopping in, but actual property taxes will vary from home to home and your Home Owners Insurance might actually be higher or lower than we estimated. Those variables are hard to determine so if you press your Loan Officer for an approval all the way up to your maximum limit, you may find out that your property taxes are too much on the home you want and you are no longer approved. Also, the property type makes a difference, if you are originally looking for a full home and then put an offer on a Townhome or Condo you might not qualify. Condos and Townhomes often have HOA dues and those could change your approval numbers, and Condo’s in particular are higher risk to lend to and often require larger down payments or require higher interest rates.
The most important thing to do while shopping for a home loan and then going through the purchase process is keeping in contact with your Realtor and your Mortgage Banker. The 3 of you should all work together to make sure that your home loan purchase experience is as smooth as possible. Agents call me on a daily basis to update me on properties that our clients are looking at to make sure that it’s appropriate and once the offer is accepted your Loan Officer should be in contact with you and your agent at least once per week for a standard update on progress. Use these tips to be prepared for your home buying experience and you’ll avoid any let downs and know what to expect!
Are you ready for your pre-approval letter today?
