If you’re even remotely thinking of buying a house, it’s best to start the process early by taking the first step and getting pre-qualified for a mortgage. Taking this step will allow you to get a preliminary idea of what your purchasing power is and what types of mortgages could be a fit for you. If you haven’t already, this is the time to establish a relationship with a lender and to also think about speaking with a financial advisor as well. It’s important to remember that your home will be part of your financial portfolio and seeing how the mortgage and homeownership fees fit into your overall financial well-being is important. You may find that you are not yet able to obtain a mortgage and knowing what it will require will enable you to plan the next steps with your financial advisor to reach your homeownership goals.
It’s important to know your lender's reputation, credibility, turn times, and their success rate with buyers. We recommend working with a lender that is not only reputable but that has a proven track record. It’s also a good practice as a seller to contact the lender that has written the buyer’s pre-qualification or pre-approval letter to ensure that what is in the letter is verifiably true and that the terms of the buyer’s offer can be met.
In order to obtain a pre-qualification letter, the lender will have you provide basic financial and personal information and ask for income information, but this is not a rigorous assessment at this point in time. You are not filling out a loan application yet or providing paper documents. There may be issues or details regarding your financial situation that require clarity or additional documentation for obtaining your mortgage, and the pre-qualification process will help bring those to light. This is the time to address those issues or obtain documentation before moving forward. This is why we emphasize getting started well before you begin your search for a new home.
You can take comfort in the fact that you’re not entering into any contracts when prequalifying, but rather you’re beginning to understand your current financial situation in regards to obtaining a mortgage. If you decide to write an offer on a home and use your pre-qualification letter, sellers will not view this as favorably as a pre-approval letter, as we said pre-qualification is the first step and not a rigorous assessment. A pre-approval is the next step on your path to home ownership.
When you move from being pre-qualified to the pre-approval process, you need to be ready to provide a significant amount of financial paperwork to the lender. It is extremely beneficial to do this before you start home shopping because 1) it’s wise to determine exactly what you feel comfortable spending before you start shopping, and 2) once pre-approved, you will be able to move more quickly to write an offer and not be scrambling to submit paperwork to get your pre-approval.
Many buyers that are not pre-approved miss out on homes because they have not done the work up front and are less appealing to a seller vs a pre-approved buyer. The documentation the lender will ask for includes but is not limited to account numbers and your two most recent statements for all of your financial accounts, W2 statements, signed personal and business tax returns from the past two years, copies of pay stubs showing your most recent 30 days of income, details on any debts, and any other details impacting your assets and monthly income.
A debt-to-Income ratio is a key metric lenders use to gauge a borrower's qualification for a loan. It’s a risk assessment formula and essentially lenders want to see that you will be able to pay your mortgage. They want to make sure you’re not spread too thin, and they need to see that you can consistently make payments on schedule. Once the lender analyzes all of your data and determines you are a viable borrower, they will tell you what purchase price you are pre-approved for and discuss different mortgage options based on your pre-approval. They will determine the amount of down payment required and will give you the current interest rates available. You can now shop for a home with confidence knowing you can present a solid offer to a seller with a pre-approval letter. A good practice is to update your pre-approval after each quarter. A lot can change in a few months, and if you anticipate any job changes, increases/decreases in your income, bonuses, or debts paid off, this can lead to changes in your mortgage options.
During the pre-approval process until you close escrow on a home, it’s important to disclose any and all pertinent information. It is imperative to be honest and timely with your lender. You do not want to be in a situation that could cause you problems down the road. A good rule of thumb we use at Aalto is if you have to ask whether or not to discuss something, then it’s probably something you should let your lender know about.
Example: You have signed your loan documents and are closing escrow on your new home in three days. You get fired right after you sign your paperwork. You think “well, at least I was able to get the loan before I was fired!” Wrong. The loan you were approved for was based on the income you had. Even if you have another job starting in a week, the lender still needs to know if you just got fired. You may have to reapply and it could cost you the house. But if the lender finds out you withheld this information, they could force you to pay the loan back even after the sale. Other things to refrain from doing while in this process include purchasing big ticket items that could change your liquidity, opening new credit cards, or transferring money to and from accounts. Although you may be excited about a new home, this is not the time to go to the major big box stores, open a new store credit card and purchase a new TV. This can have a negative impact on your credit and might end up impacting your ability to obtain a loan. Just call your lender before you do anything and make sure it won’t cause any problems!
For someone considering moving forward with pre-approval, it’s essential to look at current rates, and look at projections for where rates could go. If you’re a conservative person it’s a great time now to lock in a 30-yr fixed rate mortgage. Ultimately there are a number of options and financial products from which to choose. By taking the steps to work with a lender from an initial pre-qualification and through to a pre-approval, you will know what works best for you and your situation before you commit to buying your home and locking in your loan and interest rate.
Warning: Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. You can file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
If you have any specific questions please share them with us at firstname.lastname@example.org. We’d love to hear from you, and we’re here to help!
Aalto is a real estate broker licensed by the State of California, License #02062727 and abides by Equal Housing Opportunity laws. This article has been prepared solely for information purposes only. The information herein is based on information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy of the information. Aalto disclaims any and all liability relating to this article.