So you’ve decided to buy a house. Congratulations: You are now a mighty .2% or so of the way toward purchasing your home. Now comes the fun part: getting pre-approved for financing.
Being pre-approved for financing is not the same thing as being prequalified. Prequalified means you have an estimate in hand of how much a lender would likely give you based on your income and debts; it is nice to know – but not at all official. Pre-approval for financing means a lender has run your credit, verified income, etc. and has given you the green light on a specific dollar amount for your loan, usually for a window of time such as 90 days. Don’t confuse the two – pre-qualification will not give you any negotiating edge; ideally you’ll be officially pre-approved for financing before you begin your home search.
You’ll need to provide the following items to your lender(s) of choice in order to complete the prequalification process:
Your driver’s license, Social Security number, and any other pertinent proof of identity (such as a marriage license, if your name has recently changed.) In general, you should be prepared to act swiftly any time your lender requests documentation of any kind. Providing documentation in a timely manner will ensure the process keeps moving forward; on the other hand, dragging your feet will help make sure your loan is sluggish on the way to the finish line, too.
Proof of Income
This can take the form of W-2s, pay stubs, bank records, and sometimes written proof of income from your employer. If you receive alimony, child support, significant investment dividends or any other type of income, you’ll want to have proof of these resources as well. If your income is verifiable and can count toward the purchase of a home, be prepared to provide proof. Two years’ history is standard.
Proof of Assets
Conventional financing will require a 10-20% down payment, while FHA financing requires a down payment as low as 3.5% of the purchase price. You’ll need to provide proof of enough funds to cover the down payment, closing costs and cash reserves equal to two months of expenses, typically. If you do not have adequate cash on hand to cover these amounts, you may be able to supplement using additional reserves, such as IRAs or other investment accounts. Whether these funds will suffice as reserves depends on their level of liquidity, and you will be required to provide proof, for example, that you can access your 401k without extreme circumstances such as job loss or a death in the family. If you do not have adequate funds on hand, it doesn’t mean you won’t be able to buy a house; it may mean, however, that you have to postpone your purchase until you have adequate funds available to cover these amounts to the bank’s satisfaction.
Verification of Employment
The lender will require two months of pay stubs and in most cases will call your employer to verify employment, as well. The name of the game for lenders is job stability. Relocating and changing jobs within the same field are normal events in a person’s life. Radically changing your career field in the recent past doesn’t mean you won’t qualify for a loan, but the lender will require additional documentation, and the underwriter may want a letter of explanation outlining the reason(s) behind your career changes. Lapses in employment can be a red flag for lenders, but if you have a reasonable explanation for a lapse in gainful employment in the past two years and you have continued to meet your financial obligations reliably during that time, this does not mean your home purchase will be derailed; the lender will likely require more information, though, and your closing could be pushed back if more documentation is required.
“Good” credit encompasses a mix of factors, and lenders reserve the best interest rates for borrowers with a median credit score of 740 or above. FHA guidelines require a higher down payment for buyers with a score below 580, and if your median score is below 620, prepare to pay higher interest, or to pay a premium to buy down your interest rate to a more desirable level. The better your credit, the better your financing terms will be. Understand that lenders want your business, and while they probably can’t push a loan through if your recent job history is spotty, you have no cash in the bank and you have a series of recent negative hits to your credit – motivated lenders will have suggestions on how you can bring up your score and improve the likelihood of qualifying for a home loan in the near future.
If you are ready to buy a house, you probably want to move in as soon as possible – that’s human nature! Don’t despair if the lender’s response is, “Not right now.” We’ve had “not right now” clients who closed on a home just a few months down the road after following a lender’s advice to straighten out their credit and improve financial ratios, such as debt to income. Achieving mortgage-worthy credit can happen faster than you realize when you follow the advice of an experienced lending professional.
Your team at TRELORA is standing by, waiting to hear that you are pre-approved for financing and ready to tour one of our available listings. We can’t wait to hear from you! And if you need a referral to a mortgage professional or personal financial expert – just ask. We have a list of experienced professionals we’d be happy to share with you.