Pre-Qualification vs. Pre-Approved
Being prepared is one of the smartest things you can do to help the home buying process run smoothly. Getting pre-qualified gives you an idea of what your loan program and the amount you could borrow might look like in advance.
What is pre-qualification?
Pre-qualification is an estimate of what you might be able to borrow. It provides an estimate of your borrowing power. It is based on the information you provide verbally about your income, assets and usually includes a credit check. In the past a pre-qualification letter from the lender is all a buyer needed to hit the streets and start their house hunting journey. Recent changes to the mortgage application process have made pre-qualification a thing of the past. What now? In today’s real estate world is it necessary for the buyer to get pre-approved before they can seriously move forward with the home buying process.
What is pre-approval?
Pre-approval is a more serious step towards the buying process. It is a conditional commitment in writing for a specific loan amount and loan program. Provided all the specified conditions are met, the lender is obligated to go through with the loan. (However, you are free to walk away from this commitment before anything is signed). Pre-approval will give you a loan estimate of your actual expenses; principal and interest of the loan, property taxes, insurance and HOA fees (if any). To obtain pre-approval the borrower will need to provide their lender specific documentation (see below). Some may say this process is overwhelming or even a nuisance. Keep in mind you are asking to borrow a very large sum of money be prepared to jump though a couple of hoops.
Pre-approval is a must!
After the preliminary loan application is processed, the lender will be able to provide you with your pre-approval. With this in hand you are now fully ready to start your search! Without this pre-approval searching for homes today is a waste of your time. The new regulations have made this an absolute necessity as a seller is sure not to consider any offers without it.
Regardless of the loan amount you are pre-approved for, stick to your budget and the amount you can comfortably afford.When choosing a lender we suggest you stay local. Only a local lender will be familiar with specialized loan programs offered in the varying municipalities. Sometimes these loan program offer free down payment assistance or no interest loans for the down payment monies. Also, your local lender will know exactly what the tax rates and other local
fees will be and are able to better prepare you for these expenses.
Below is a list of the documentation you will need to move forward with the pre-approval process and ultimately loan application:
- Most recent pay stubs that include year to date income covering 30 days for ALL borrowers
- Most recent W2’s for the past 2 years for ALL borrowers
- Proof of additional income needed to qualify (Social Security Awards Letter, Child Support, Annuity, Pension/Retirement 1099 or part time employment pay stubs/W2’s
- Signed & Dated Federal Tax Returns with all schedules (pages) for the past 2
- Signed and dated year to date profit and loss statement for this year if self-
- Most recent 2 years Federal Corporate Tax Returns with K-1’s if incorporated
- Most recent bank statements for 2 consecutive months (all pages included)
- Most recent asset statements for 2 consecutive months including Mutual Funds,
IRA’s 401K, Money Markets (all pages and all accounts included)
- Divorce decree or separation agreement
- H1 Visa if applicable
- VA eligibility certificate (DD214, nearest living relative) if applicable
- Legible copy of driver’s license for ALL borrowers
- Homeowner’s insurance declaration pages and Agents contact information
- If current homeowner:
- Most recent mortgage statements
- Most recent tax bill
- Copy of 2nd lien if applicable (if subordinating, or a rate term refi)
- Possible letters of explanation for:
- Large bank deposits
- Credit inquiries
- Job gaps
- Address inquiries