Loan Application | Prequalification

JimattheTop Blog | Jim Pedicord | RE/MAX Top Realty Houston | 713-558-2537

Why Do I Need To Get A Mortgage Pre-Approval?

You might say, “I’ve been searching online, cruising neighborhoods looking for the “PERFECT” house and I can picture myself grilling steaks on a great new patio. I'm ready to MOVE!”

You probably know in the back of your mind that there’s plenty of detail work to do before you can actually get to any really serious dealing, but that’s no fun!

OK, just take a deep breath and let’s start at the beginning: in today’s market you MUST have one thing in hand before the fun begins, your pre-approval letter.

Mortgage Pre-approval | Jimatthetop | Jim Pedicord | RE/MAX Top Realty Houston
Pre-qualified or Pre-approved?

One important thing you need to know is the difference between being pre-qualified and pre-approved.

Pre-qualifying merely means you’ve been preliminarily checked out by a lender. It is only a first step to find out how much you can borrow. With some basic information the lender will provide a rough estimate of what you might be able to get in the way of a mortgage. This is pretty much useless in making deal on a home, but it WILL let you know if you are possibly setting your sights too high, or if there is something maybe in your financial condition that needs work to get you the best long term financing. And, it doesn’t cost you anything.

The pre-approval process takes the preliminary loan process a step further, essentially the same as actually applying for a loan. Specific financial information is gathered, essentially the documents that will be required to complete the actual loan process, including tax returns, bank statements and employment verification. They will pull a complete credit report and get scores that are designed specifically for the mortgage business.
(Just a sidebar, the credit score you might get from your credit card folks or a consumer credit service will probably not be the same.  Those scores are designed for general credit purposes and have a somewhat different focus.)
With a pre-approval letter from your lender, real estate agents and sellers know you are a serious buyer.  This letter will be provided with your offer on a property. It proves that you already have the ability to get a mortgage and make it through to closing, which makes your offer much more attractive to the sellers.

What documents will you need for a mortgage pre-approval?

For typical Mortgage Companies you can help expedite the loan application process by bringing or attaching the following documents to your loan application (for each co-borrower, spouse, etc.):

  • Most recent paycheck stub with year to date earnings
  • Last two months of current, consecutive bank statements, including all pages from all accounts
  • Most recent statement from investment accounts such as mutual funds, 401K, etc.
  • W-2 tax forms from the last 2 years
  • Name, address and phone number of landlord or Mortgage Company for previous two years
  • Name, address and phone number of employer for previous two years
  • Copy of Driver licenses
  • For FHA loans, a copy of your social security card.

If applicable, also provide:

  • Divorce decree
  • Will probate documents
  • Proof of other income such as retirement, child support
  • Copy of contract, earnest money agreement for new property.

Special circumstance requirements:

  • New construction: plans and specs for new house, construction agreement, Final Closing Statement for lot purchase with release of lien or deed
  • Refinance: Final Closing Statement form from when you purchased house, year-end mortgage statements, survey, homeowners insurance policy
  • Commissioned buyers: two years tax returns with all schedules and a year-to-date statement of earnings and expenses
  • Self-employed buyers: two years tax returns with all schedules, K-1 (Form 1065) and current P&I with Balance Sheet
  • Rental Property Owners: current lease agreement and two years tax returns.

Note: Some lenders may require more or less documentation, some want data going back further; and in some cases alternative documentation may be acceptable.

It’s helpful to create a folder in Google Drive or Dropbox where you can upload and update all documents in one place. If you wind up ultimately choosing a different lender than the one you used for your pre-approval, you’ll be able to share documents with just a few clicks.

Mortgage pre-approvals aren’t a sure thing

The only thing the lender can’t pre-approve is the house you buy.  A mortgage pre-approval letter puts you head and shoulders above other buyers who may be interested in the same home as you are — but it’s not a guarantee. The pre-approval process does not include a full-fledged underwriting review by the lender, so it’s not an absolute commitment to issue you a loan on whatever property you choose, though it is pretty close. There may even be conditions listed on the pre-approval that are contingent to receiving a loan.

While a pre-approval is proof that a lender is willing to make you loan, it is not an official commitment until you have a purchase contract in hand and complete the full application process. Other matters during the closing process can trip things up, including an appraisal of the home’s value and your ability to make a sufficient down payment. And of course, changes in the going interest rate or in your financial situation can change what you are able to afford up to the moment the lender’s actual commitment is made.
When pre-approval isn’t necessary

There can be good reasons to skip loan pre-approval when house hunting. If you’re doing preliminary research on an area that is simply a potential new home base — checking out home prices, schools and lifestyle — it’s best to wait until you have a better idea of what you’re willing to spend, and where.

Also, delay pre-approval if you need to iron out some wrinkles in your credit history. Pulling your credit score and then determining what improvements can be made should be done before seeking pre-approval for a loan.  You can identify that kind of issue with a pre-qualification review.

However, if you know your credit is solid and you’re on good financial footing, a pre-approval will give you the confidence and flexibility to do some serious house hunting. You’ll have more leverage when negotiating a price.
What your mortgage pre-approval letter says

A typical pre-approval letter will say something like:

This pre-approval is issued based on your current credit history, income, assets and debt — assuming that there are no changes in your financial situation. This pre-approval should not be considered a commitment to lend until the following conditions are met:
      1. A valid sales contract is initiated on a specific property.
      2. A satisfactory appraisal is completed on such property.
      3. You select a mortgage program, which allows your mortgage payment to fall within the pre-approved amount.
      4. And a rate commitment is issued by our company under the above-referenced mortgage program.”

The letter will often state an approximate purchase price that you qualify for, and usually an expiration date, often within 90 days.

One other thing, some lenders will charge for a pre-approval letter, but most will not, hoping to get your business. Just don’t choose the lender because they don’t charge you.
NOW can we shop?

OK, you’ve got the letter. NOW you’re really in the hunt, getting packed and ready to move to your new address. Some things to remember:
  • A pre-approval letter is not a guarantee – there’s no firm loan offer until a specific property has been identified.
  • Lenders want to have some wiggle room in case your financial situation changes between the time you obtain the letter and when you actually find a home and complete the loan approval process. What that means:
    • Keep your finances clean and stable – pay everything on time (or early)
    • DO NOT (as in NEVER) open any new credit accounts — for furniture or anything else you’ll be planning for your new address. Don’t even apply without purchasing anything, because a “hard” inquiry can affect your credit score
    • Keep existing accounts paid up and without substantial balance increases.
  • Having a pre-approval letter in hand is often required in order to place a bid. A loan pre-approval might not be a home run, but it will get you on base.

    A loan pre-approval might not be a home run, but it will get you on base.

Are you ready to start working on the process of moving to YOUR dream home?

 Dream Home | Jimatthetop | Jim Pedicord | RE/MAX Top Realty Houston
OK, maybe not this one.
To request loan pre-approval, pre-qualification or to apply for a mortgage, we have a number of lenders we work with who are great at getting buyers CLOSED! Mortgage Pre-approval | Jimatthetop | Jim Pedicord | RE/MAX Top Realty Houston

Information On Demand | Jimatthetop | Jim Pedicord | RE/MAX Top Realty Houston
James Pedicord
James Pedicord
Realtor® MRP, ACP, GMA, NHCB