Getting ready to begin the mortgage process? You’ll likely want to get started by getting pre-approved. Being pre-approved for a home loan is beneficial in several ways. It gives you a solid idea of what you can afford, thereby helping you narrow down your home search, and it shows sellers that you’ve already taken the necessary steps to secure financing, which makes you a stronger buyer. But how can you best prepare for mortgage pre-approval success? Simply follow the steps below and you’ll be well-prepared for getting your pre-approval letter.
Step 1: Gather Documents
Your mortgage lender needs certain paperwork/documents in order to evaluate your creditworthiness and determine how much money their institution is able to lend to you. Some of these documents will most likely include…
- The Mortgage Application – This needs to be completed before anything else and it will provide your lender with critical info like your name, address, telephone number, birth date, social security number, work history, and so on.
- Your Credit Report – Your loan officer uses the info in your mortgage application to obtain a credit report, which will be analyzed by the institution’s underwriter.
- Pay Stubs – If you are employed, your loan officer will need recent pay stubs or your W-2s for the most recent 1 or 2 years.
- Tax Returns – If you are self-employed, you may need to provide the loan officer with copies of your tax returns for the last 1-2 years. This may also apply to borrowers with rental property. Many additional types of non-employment income, such as retirement income, social security income, interest and dividends, etc., may require tax returns during the mortgage pre-approval process. If you own a company that files corporate tax returns, you may be required to provide copies of those tax returns to your lender, including any K-1s, income documents such as a W-2 or 1099 if your company is a partnership or S-Corporation.
Other documents needed for mortgage pre-approval may (but not necessarily) include bank statements, employment contracts, and certain documents that pertain to specialized loan programs, i.e. a certificate of eligibility (COE) for VA loans. Speak with your mortgage professional to find out what specific documents you will need to be pre-approved.
Step 2: Prepare Questions
Create a list of questions you want to ask your mortgage lender and real estate agent when you meet with them for interviews. If you’re not sure which questions you should ask, take a look at some of the points on this page. You’ll want to know may include…
- Whether you’re working with a direct lender or a broker
- If your lender/broker can accommodate your special financing needs, i.e. low credit, low down payment, etc.
- What are the total costs of the loans you’re considering, including the interest rate, broker fees (if any), points (if any), prepayment penalties, application fees, credit report fee, appraisal fee, etc.
Step 3: Understand Your Financial Situation
Do the math to determine what you can comfortably borrow vs what you are eligible to borrow. Remember, just because you may be pre-approved for a certain amount doesn’t necessarily mean you should borrow that much. For example, you may be pre-approved for $200,000 when in reality, you may be better off spending closer to $175,000. The amount of money you are pre-approved for is an indication of how much money the lending institution is willing to let you borrow — and while it can certainly help you narrow down your home search by eliminating any properties that are priced above your pre-approval amount, it may not be a good reflection of what you should actually spend on a home. Knowing this ahead of time will help you avoid financial stress down the road.
Step 4: Communicate With Your Loan Officer/Broker Often
Once you have prepared yourself for pre-approval success, talk to your loan officer/broker about setting up a time to meet and discuss getting pre-approved. Be sure to have those documents ready as well as your list of questions. After your initial meeting, your lender/broker should follow up with you to take the next steps or address any questions or concerns you may have. If you have questions or concerns that they have not yet addressed or that you thought of after your meeting, don’t hesitate to be the one to reach out to them. Communication is a huge component of a successful mortgage transaction, and since it is likely to be one of the biggest financial transactions you’ll make in your life, communicating clearly and often is key!