4. Get Pre-Approved for a Home Loan
Getting pre-approved for a home loan should be one of the first steps towards becoming a homeowner.
Looking at homes for sale online is amazing, and easy as ever with the technology of today. There’s even 3D, virtual reality technology available now that allows you to “virtually” walk through the house, and turn around and look at each room. SUPER cool.
And only way to get out of this “window shopping” mode and into actual “homebuyer” mode, is to get Pre-Approved for a home loan. Having a letter from a lender alone is not enough.
Many sellers and real estate agents do not trust a letter from a lender without proof that your documentation has been reviewed. This documentation is usually in the form of a Fannie Mae DU (Desktop Underwriter) Approve/Eligible.
In this article, we are going to explore the topic of getting pre-approved for a home loan, how to make sure that your pre-approval is accurate and realistic, and how to make more competitive offers after getting pre-approved.
Am I Really Pre-Approved?
How do you know if you’re really pre-approved? What if the lender makes a mistake? What if something changes by the time you find your dream home? These are important questions. These are great questions.
Getting approved to borrow hundreds of thousands of dollars it is not a quick, or automated, process if you want it to be accurate. Working directly with an experienced loan officer is the only way you can truly be confident that your loan pre-approval is accurate.
Let’s play devil’s advocate for a moment. How do you know if your “experienced” loan officer really knows what they are doing?
We will cover hiring a loan officer in another article, but here is a quick way to identify whether or not your loan officer can be trusted to provide you an accurate pre-approval:
- Did you complete a loan application, or did your loan officer complete it with you over the phone?
- Did your loan officer review your credit report(s)?
- Did your loan officer review your pay stubs, bank statements, w2’s and/or tax returns?
If you answered “No” to any of these questions, then you may not be truly pre-approved. Getting pre-approved means that you complete a loan application, and have your credit, income and assets reviewed.
If your loan officer is providing you with a pre-approval letter based off of a phone conversation only, you need to turn and run.
Any lender willing to send you out shopping for homes, and making offers without being fully pre-approved is putting your time and MONEY at risk!
I’ve done this a few times myself….
Note from the Author: Assuming that your loan officer is awesome sauce, you should hear some form of these things during your conversation with them. If you do receive similar advice to what I’m providing here, you’re in good hands.
I have nothing to gain by sharing with you what i’ve learned since 1998, almost 20 years. I share this with you because I am passionate about preventing bad loan officers from surviving in the business. I am here to empower consumers.
When you are speaking with your loan officer, there is a commission at stake. The loan officer’s income depends on whether or not they can help you. What surprises me is the number of loan officers out there that are so focused on the “opportunity” of a commission, that they will say “yes” with nothing to back it up.
I may come across as being cynical, I get that. I have been operating a consumer education blog at www.FindMyWayHome.com since 2007. I speak to many people a month that are in escrow, have spent money, and are told that they do not qualify for a loan. Can you imagine?
I have unusually high exposure to poor performing loan officers through so many readers sharing your experiences and asking questions on this website. I answer every question and take every phone call.
What 20 years of experience taught me is that by sharing what I’ve learned, you will have a fighting chance out there in real world, looking for a great loan officer you can trust. If you need an introduction, shoot me an email to firstname.lastname@example.org with the State you’re buying or living in, and I will try to point you in the right direction.
Now back to your regularly scheduled program……
What Paperwork Will I Need?
Depending on the level of your motivation, I might ask for less paperwork if you are in the very beginning of the process and only curious about what you might need to save, or pay, to buy your dream home in the near future.
The minimal documentation is actually about 90% of what is needed to get you an automated underwriting approval. An automated underwriting approval is what the seller of your dream home will require when you make your offer.
Minimum Documentation List – Quick and to the Point
- Last 30 days pay stubs for all borrowers
- Last 2 years w2 statement for all borrowers
- Last 2 years tax returns, all schedules
- Minimum: Verbal of source cash to close will come from (assets, gift, equity)
Additional Documentation – Verbal of balances ok to start
- Last 60 days bank statements covering funds to close
- 401k documentation if taking out loan against retirement
Complete Documentation List for Most – Will eventually be needed
- Borrower’s Authorization form
- Current Driver’s License for all borrowers
- Social Security Card for all borrowers
- 4506T Form signed – Authorization to order tax transcripts for income verification
Self Employed, Bankruptcy, Foreclosure, Short Sale or Deed in Lieu in Past
If you are self employed, or suffered a financial hardship in the past, expect that additional documentation will be asked for.
- Evidence of 2 years as business entity (business license)
- Last 2 years business tax returns or Schedule C – if applicable
- Bankruptcy petition – if applicable
- Bankruptcy discharge – if applicable
- Bankruptcy notice to creditors – if applicable
- Final HUD from short sale – if applicable
- Deed in Lieu agreement – if applicable
- Addresses of homes included in BK – subsequent foreclosure, short sale or DIL
Top 3 Things Lenders are Looking At
There are some basic underwriting requirements that must be met in order to qualify for Government or Conventional mortgage loans. Each individual program has it’s own restrictions and exceptions to these standard guidelines.
Credit Scores – The minimum credit score for most programs is 620. Some lenders will have different restrictions. Other programs may require higher or allow lower FICO scores. I have investors that will go down to 580 with a FHA loan, 620 for conventional.
Higher credit scores will reduce closing costs if using conventional mortgage. All that is required to run your credit is your address, full name, social security number and most importantly, your permission.
Residence/ Employment/ Income History – Most programs will require the documentation of 2 years of Residence (payment documentation is only required for 12 recent months).
You can simply state your last two year’s residence. Employment history is documented during application stage, and backed up with W2’s from employer to support employment and income.
Asset Documentation – Most lenders will ask for 60 days of asset documentation. An asset is any liquid account you have access and at least partial ownership of.
There are very specific rules about “Gift Funds”. If you will be receiving a large sum of money from a blood or marriage relative, please disclose to your loan officer so they can instruct you the best time and method (least paperwork) for receiving that Gift Money.
How Long Will it Take?
A Loan Application is a relatively simple process. If you have all of the above documentation close by, or available it can be scanned uploaded to your loan officer’s secure documentation procedure.
The Loan Application can be completed in 10-15 minutes if you are doing an online application. Plan probably on closer to an hour if you would like to do the application in person, or over the phone, so that you can ask all of the questions on your mind. Don’t be afraid to ask too many questions, there’s no such thing as too many questions!
Once all support documentation is submitted and credit permission is given, a pre-approval can be determined within 1-3 hours by a live person in perfect conditions, without prior appointments or distractions.
Expect the process to be 24 hours following submission of all Support Documentation and completion of Loan Application.
If you are self employed, or had a financial hardship in the past, including bankruptcy, foreclosure, short sale, or deed in lieu of foreclosure, you can expect additional documentation, and a longer approval process.
Pre-Underwritten Approvals – A Competitive Advantage
Some investors allow for the pre-underwriting of a purchase. Speak to your loan officer about availability of this option. A pre-underwritten loan essentially assumes a specific loan amount.
Typically this means that a lower purchase price is ok, because you’ve already established qualifying ratios at a higher purchase price. If you enter escrow at a higher purchase price, the pre-underwritten approval can be updated, but technically is no longer valid.
Your pre-approval is the actual underwriting approval directly from the investor’s underwriter assigned to your file. Once you have an approval from an underwriter, the rest of the process should be a cakewalk.
This is a great strategy when it’s available. If you’re the prepared type, this might be a great opportunity for you to have a competitive advantage when making offers.