Mortgage Financing Pre-Approval
After choosing a trusted Broker/Realtor® (like me) - The next most important step is to choose a mortgage lender (unless you are paying cash or the seller is providing financing). Before actively scheduling appointments to view homes, you want to be "pre-qualified or pre-approved" in order to confirm your purchase price budget. Then, your Realtor® can pinpoint homes that will match your finances to make your search much more efficient and productive. Plus, most Realtors® recommend mortgage pre-approval because it strengthens your offer, sellers like to know the buyer already has financing secured. Your mortgage professional will provide a "pre-approval letter" that will be sent with your initial offers to give the seller more confidence in you as a buyer and help your offers stand out from other potential buyers.
Before You Choose a Mortgage Lender, Read These Tips
The right lender can save you time, anxiety, and loads of cash. And the right loan officer — the professional who represents the lender — can be a powerful ally when you close on a mortgage. As with any potentially life-altering partnership, it’s important to choose wisely. Only you know which lender is your type. If you’re serious about buying a home, getting pre-approved for a mortgage is a critical step, it’s also a tedious one. Lenders want a mountain of documents and have so many requirements. Yet the payoff is worth it. Plus, you’re going to need that same hefty stack of paperwork for your official mortgage application once you’ve got a contract on a home, so you’re really knocking out two tasks at once.
There are three basic types of mortgage lenders — retail banks, credit unions, and mortgage banks — as well as mortgage brokers, who compare loan products of potential lenders to help you find the right one. Before you start narrowing down the candidates, you have to know what you’re looking for, and where to find it. Let’s talk about your options.
Retail Banks, like Chase, Bank of America, etc. - plus your local banks - do their own underwriting (in a nutshell, investigating your finances), so retail banks, especially the smaller ones, can sometimes offer lower fees and less-stringent credit requirements. But, keep in mind, they may offer a limited number of programs.
Credit Unions are not-for-profit and customer-owned, so they’re not obligated to corporate shareholders like a bank. Because of that and their not-for-profit tax status, they typically offer more personal service and lower fees. But, similar to retail banks, they may offer a limited number of programs. To apply for a loan, you must be a member of the credit union’s community, which could be faith-, employment-, interest-, or union-based, among other things. That said, it’s typically not difficult to become a member; the National Credit Union Administration’s Credit Union Locator is a tool for finding credit unions near you.
Mortgage Banks, such as AimLoan and PennyMac, only offer home loans. Many online lenders, like Rocket Mortgage and others, operate as mortgage banks. You should consider that an online lender might not be fully available when you need them, you will usually be communicating by email or website chat and they usually offer less hand-holding (ie. less customer service if you're OK with that). You should have a better competitive advantage with someone that you can reach whenever you need to. You want to have someone you can sit down face-to-face and have a conversation about your overall financial goals or just work out the details of a last minute issue on this present goal (closing on your new home).
Mortgage Brokers are essentially personal home loan shoppers — they act as liaisons between home buyers and mortgage lenders to help people find the lowest rates and the best mortgage terms. They’re able to get home buyers the best mortgage rates because they leverage their existing relationships with lenders — something individual home buyers can’t do. By doing the heavy lifting for the borrower, the idea is that they make loan shopping more convenient — and perhaps a bit faster.
When you are shopping for a mortgage lender, it’s important to make sure you are working with an experienced, professional loan consultant, someone that you feel comfortable with and you feel is competent to help all the way through the process. The largest financial transaction of your life is too important to place into the hands of someone who can’t give you the advice and troubleshooting you need. Unfortunately, many banks and mortgage companies that may appear to have the “lowest rate” may not have the best mortgage advisors. Having an expert lender that can help navigate that makes for a better experience all the way around. You should also lean on the expertise of your Realtor® and who they have a relationship with, which will help in communication throughout your home purchase. If you have good relationships with your Realtor® and your lender then it can and should go smoothly and actually can be fun.
It Pays to Shop Around Before You Commit!
Over the life of the loan, seemingly subtle differences could add up to tens of thousands of dollars. That money belongs to future you and all your dream vacations, renovations, and remodeling goals. So before you choose your specific lender ...
Don’t be shy about seeking advice. Survey your family, friends, and coworkers — especially the ones who are nerdy about money.
Ask your Realtor® for suggestions. They have experience with reputable lenders, particularly in your city or town.
Thoroughly research any retail bank, credit union, mortgage bank, mortgage broker, or online option you’re considering. Make sure you’re clear on what they can offer you. About one in five (21%) home buyers said they regret their choice of mortgage lender, according to a recent J.D. Power survey. You’re doing your homework so that won’t be you.
Interview lenders. You’re aiming for a shortlist of three. The next step is finding out whether they will give you a loan. If you’re thinking about selecting an online lender, make sure you take into account the tips above.
There’s a world of difference between being pre-qualified for a loan and being pre-approved. Pre-qualification is an approximation and not necessary unless you have no clue about your creditworthiness and just want a snapshot. Pre-approval is proof that you can buy.
It makes good sense to get pre-approved by at least three lenders. When you’re pre-approved, you’ll receive a Loan Estimate. This three-page document spells out a future loan’s terms, including: the interest rate, the length of the loan, estimated costs of taxes and insurance, how interest rates and payments might change over time and other important financials such as the lender's fee.
Look at the Big Picture, the interest rate is only part of your borrowing story. Use the annual percentage rate (APR) to figure the total cost of your loan (or to compare two loans), because APR reflects your interest rate and loan fees combined.
Local Mortgage Professionals
For your convenience, below is a list of mortgage professionals that past clients have used for you to interview and consider.
Documents You Need for Mortgage Pre-Approval
This list of documents may not be comprehensive but it is a great start. Additional documents may be necessary depending on your situation, the type of mortgage program you qualify for or choose to use and the individual mortgage professional's underwriting requirements. Consult the mortgage professional of your choice.
To provide you with the most accurate pre-qualification, your lender will need the following documentation:
- Copy of your driver’s license, passport or other state-issued or federal-issued ID (at least one from the list)
- Last 2 years of W2 statements from your employer (or 2 years of 1099s if self-employed)
- Last 30 days worth of pay stubs
- Last 2 months of bank statements (checking/savings) — all pages, even blank ones
- Name and phone number of your landlord to verify rental payments (if applicable)
The following items may also be helpful if applicable:
- Last 2 years’ individual tax returns — all pages and schedules
- Last 2 years’ corporate, S-Corp, LLC, or partnership tax returns — all pages and schedules
- Proof of any additional income (second jobs, social security, alimony, etc.)
- Divorce decree or Court Order defining alimony or child support payments
- The most recent statements for all stocks/bonds/mutual funds/401K — all pages
- Settlement statement from previous home sale (closing disclosure or HUD-1 if the sale took place before Oct. 3, 2015)
- Gift letter if a family member is helping with down payment (lender will have form)
- A letter of explanation (LOE) for late payments, collections, judgments, or other derogatory items in your credit history
- Information on any deferred student loans. What will the payments be when deferment ends?
- College transcripts (if graduated within the last 2 years)
- Recent mortgage statements on all properties you own
- Proof of insurance for all properties you own
- Current leases for all rental properties you own
- Last two months’ profit-and-loss statements (you can put one together in about five minutes)
- Balance sheet (rules vary by state)
- Current business license
- For a VA loan - Certificate of Eligibility (COE) from the Veteran’s Administration, which may require one or more of these documents, depending on your situation:
- Form DD-214, certificate of release or discharge
- Statement of service from the adjutant, personnel office, commander, or higher headquarters if still on active duty
- Form 26-1817 or form 21-534 for surviving spouses, plus form 1300, report of casualty, or death certificate
The lender's job is to assist you and help you get approved. It is important to share any details that may impact your approval so they can plan ahead and navigate the process without any surprises. A pre-qualification is not an application for credit. Pre-qualification is a service to consumers who are interested in pre‑qualifying for a mortgage loan before they submit an application. In accordance with federal regulations, consumers are not required to provide verifying documentation until after they submit an application, receive a Loan Estimate, and state their intent to proceed with the loan transaction.
The Mortgage Process
Now you are ready to find your new home. Once your offer has been accepted by the seller, you’ll be hearing from your lender alot. These are some highlights when they will notify you and your Realtor®:
Receive your appraisal
Submit your loan to underwriting (It is very important that you provide all requested documentation in a timely manner. If you do not, your closing date may be in jeopardy. Within a week from when you sign your loan application, you will need to deliver all the requested documentation.)
Receive your conditions from underwriting. (During the underwriting process, you may be asked for additional information referred to as “conditions.” Please be sure to provide any additional information as quickly as possible.)
Obtain final underwriting approval
Deliver your initial Closing Disclosure at least three business days before closing. (Certain changes that occur after the initial Closing Disclosure is delivered will require a revised Closing Disclosure and an additional 3-business day waiting period to close. These include a change to your loan product or a change that causes the APR to become inaccurate based on regulatory legal limits. Other changes will be reflected on a revised Closing Disclosure received at or before closing.)
A Typical Mortgage Process Timeline
- Accepted Offer
- Loan Estimated Delivered
- Good Faith Deposit/Order Appraisal
- Purchase Homeowners Insurance
- Update Credit Documents (if needed)
- Receive Appraisal and Submit File
- Conditional Approval
- Submit Underwriting Conditions
- Lock in Rate (if not done)
- Clear to Close Approval
- Loan Commitment Due (if applicable)
- Initial Closing Disclosure Delivered (at least three business days before scheduled closing)
- CLOSING DAY! (all documents are signed)
- Lender transfers the necessary funds to title/escrow who records the deeds.
- You are now entitled to take possession of your new home!