One of the first steps to buying a home is getting pre-approved for a mortgage (unless you’re paying cash for a property, of course.) A pre-approval letter is documentation that a lender is willing to lend a certain amount of money to you. It proves to a seller that you have the financing to purchase their home, so it is a necessary part of the home buying process!
Pre-Qualification v.s. Pre-Approval
It’s important for first-time homebuyers to distinguish between pre-qualification and pre-approval. Pre-qualification is merely an overview. It requires some personal information, but rarely any documentation. Pre-qualification gives you a good idea of how much of a loan you can qualify for/what kind of property you can afford, but it’s useless when it comes to putting in an offer. On the other hand, pre-approval requires a lot of documentation and pretty much secures that the bank will help you finance your home. It holds weight at the offer table.
The Pre-Approval Process
After you find a mortgage lender to work with, you will have to supply a lot of information. It can feel overwhelming to track down all of this paperwork, so if you know you’re planning on buying a home a few months in advance it’s worth it to start hunting down your documents early. Once you actually obtain a pre-approval letter, it will be valid for roughly 60-90 days (it’s not an indefinite timeframe because your credit or financial situation could change.)
Here’s what you’ll need to have on hand before you start the preapproval process:
- Past 2 months of bank statements
- Past 30 days of pay stubs
- Identification such as your driver’s license
- Two years of tax returns
- Two years of W-2s and 1099s
The Mortgage Application
In addition, the mortgage application itself will ask you a lot of questions about your financial situation and purpose for the loan. Here are the 9 main sections of a mortgage application and what you need to know in order to fill them out.
1. Type of mortgage and terms of the loan
- For example: FHA, Conventional, VA, or USDA loan. You may not know this yet, and that’s okay. Your mortgage lender can help you figure out what’s best for you.
2. Property information and purpose of the loan
- In this section, you’ll be required to put the area where you want to buy and/or the property address (it’s okay if you don’t know yet or you’re flexible.)
- You will be asked whether the loan is for a purchase, refinance, or construction, as well as whether it’s a primary residence, second home, or investment property. In addition, you’ll indicate who will own the property and who will be on the title.
3. Borrower information
- This includes your and any co-borrowers’ identification information such as (but not limited to) social security number, address history, and years of school attended.
4. Employment Information
- This includes your employment history for the past two years, job titles, income, and contact information for employers. Lenders want to verify your employment so that they know you have a stable enough income to make your loan payments.
5. Monthly income and combined housing expense information
6. Assets and liabilities
- In this section, you’ll provide your assets: current bank and/or credit union checking and savings accounts, as well as investments and retirement accounts.
- Liabilities include any outstanding debts (think student loans, credit cards, and car loans), alimony, child support, etc.
7. Details of the Transaction
- This section is largely filled out by the lender once the buyer selects a property. It includes items such as purchase price, loan amount, and closing costs.
- In this section, you’ll delve into your past. You’ll disclose whether or not you have past foreclosures, lawsuits, or bankruptcies, as well as if you are a citizen.
9. Acknowledgment and Agreement
If you are in the process of getting preapproved for your first mortgage, we want to hear about it! Or, if you know someone who is, we encourage you to send this blog post along.