Step 3 to Buying a Home: Get Pre-Approved for a Mortgage
Now that you've hired a REALTOR® to advise you and guide you through the biggest financial decision you will ever make, the next step in the process is to get pre-approved by a mortgage lender and determine how much you can comfortably afford. During this process, you will learn how much your monthly payments will be and estimates on how much you will be paying each month in taxes and insurance.
With so many options for mortgage lenders, including your neighborhood bank, selecting a professional and experienced mortgage lender is a vital component for a smooth home purchase. Some of our most frustrating transactions have been largely due to inexperienced mortgage lenders. For this reason, we highly recommend removing the unwanted stress caused by delays in closings and, in the worst case scenario, not securing the home of your dreams. In our experience, you will find the most well qualified mortgage lenders working for themselves or for a boutique brokerage and NOT your neighborhood bank.
Similar to hiring a REALTOR®, we highly recommend interviewing a number of mortgage lenders and requesting loan estimates from each and every one of them. This will give you an opportunity to compare the loan offerings and figure out which mortgage lender you think will be the best for you.
Paperwork You Will Need to Provide Lender
To start the process of getting pre-approved, the lender will request a number of documents that act as proof of income, assets, and debt which they will use to determine how much of a loan for which you qualify. The documents lenders will require can vary from lender to lender, however here is a list of documents most lenders require:
- Past two months of pay stubs
- Past two years of IRS form w2
- Past two years of US Federal Tax Returns
- The two most recent months (or a quarterly statement) of any asset information listed on the application. Generally: checking, savings, 401k, mutual funds, individual stock accounts, IRA’s, etc.
- A completed application, which the lender will provide to you directly.
Getting your pre-approval Letter
Generally, once you submit the above items to your lender you should receive a pre-approval letter within 2-3 business days. The lender may ask for additional documentation. They are not trying to be difficult by asking for additional documentation, rather, after the housing bubble burst, underwriters became much stricter regarding the loan approval process which now requires a lot more documentation today, compared to a decade ago.
In addition to the pre-approval letter, the lender will provide you with detailed information including the monthly mortgage payment and whether you will be required to pay Private Mortgage Insurance. The lender will also give you the option to include your property taxes and homeowners insurance into your monthly payment for your convenience. There are different schools of thought on whether it is wise to include the taxes and insurance in your monthly payment and it boils down to whether you like to be in control of every payment made from your checking account or whether you prefer the convenience of an automatic payment made on a monthly basis rather than lump sum payments made semi-annually.
Once you feel comfortable with the mortgage process, please forward us your pre-approval letter and we'll include it with the offer you make on a home. Including it with an offer illustrates to the seller that you are a well-qualified buyer and may influence their decision to accept your offer over a competing offer without a pre-approval letter.
Understand Your Closing Costs
Another benefit of starting the pre-approval process early in your home buying endeavor, you will have an opportunity to receive a detailed estimate of the closing costs that will be involved with the purchase. Understanding the closing cost fees is another very important step in the home buying process. Generally, closing costs will be roughly 2.5% of the purchase price of your next home. Your mortgage lender will provide you with more detailed estimates based on your exact pre-approval price. Remember, these closing costs are due at closing (except for the inspection fee which is due on the day the services occur) and are on top of your down payment. Therefore, if you’re buying a $250,000 property and putting down 20% towards the loan you’ll need to have $56,250 cash available at closing ($50,000 for your down payment and approximately $6,250 for the closing costs).
Comparing Mortgage Lenders
We highly recommend submitting applications with 2-3 mortgage lenders and comparing the different fees and interests rates available to you. Because every mortgage application you make will require the lender to pull your credit, we recommend starting the conversation early and waiting 2-3 weeks between applications with the different lenders. If you apply for all 3 at one time, it is likely your credit will go down a couple points because the FICO calculation will assume you are applying for three different loans, rather than just one.
If you would like us to answer any questions about the mortgage pre-approval process, please don't hesitate to call us at (253) 696-6566 or connecting with us via the form below.