During the height of the real estate boom, getting a mortgage was as
easy as picking out a new coffee table for the living room. Now,
homebuyers have to jump through rings of fire before they can sign on
the dotted line.
Today, the first step in landing a home loan is obtaining a letter of
preapproval. This means a mortgage lender has verified that you
re-approved for a mortgage of a certain amount over a fixed timeframe.
Preapproval letters are prepared even before youâ€™ve picked out your
home. They remove some of the uncertainty in the home-buying process. In
the current housing market, real estate agents and sellers wonâ€™t want
to work with buyers unless they have one.
With a letter in hand, buyers know exactly how much they can borrow
and therefore how much house they can afford. A preapproval letter shows
the seller and the sellerâ€™s agent that the buyer is capable of buying
their house. For most sellers, the issue is not whether they can get an
offer, but whether they can close the deal.
Agents see preapproved buyers as more serious (and more valuable)
because theyâ€™ve taken proactive steps to secure a preapproval. When itâ€™s
time to make an offer, a preapproved buyer will be in a better position
Hereâ€™s what homebuyers need to know about the new rules of mortgage preapproval.
Shop around. And shop early.
When seeking preapproval, talk to a few different mortgage lenders to
find the best mortgage package that suits your needs. Three to five
lenders are usually best. More arenâ€™t necessary to get a good deal
because loan packages are generally very similar and pricing tends to be
comparable. And consult with lenders before you start house hunting.
This way, youâ€™ll know how much you can borrow and which houses are in
your price range.
Prepare your financial biography.
Getting preapproved means a lender must review and verify a
homebuyerâ€™s income, credit and assets to ensure he can make the
necessary monthly payments on a house. In the wake of the housing bust,
borrowers must be more forthcoming when it comes to their finances. Your
lender should tell you precisely what you need, but be prepared to
- W2 statements (or 1099 income statements) for the last two years
- Federal tax returns for the last two years
- Bank statements for the last few months
- Recent pay stubs and proof of other income
- Proof of investment income
Know youâ€™re not obligated to one lender.
Preapproval doesnâ€™t bind you to a particular lender; itâ€™s just a
promise â€” albeit, a conditional one â€” that the lender is willing to make
the loan. The buyer isnâ€™t obligated to borrow from that lender.
A preapproval will stipulate the loan amount or monthly payment but
not necessarily the loan type or rate. When you apply, lenders use that
dayâ€™s mortgage rates to estimate costs and payments. Just donâ€™t expect
them to keep the same rate they preapproved you with as the actual rate
that will be available when you find a property and sign a purchase
Keep an eye on your credit score.
Usually, a loan inquiry can ding your credit score. If you applied
for a bunch of credit cards within a short period of time, for example,
your FICO score might fall. (Most lenders use some version of the FICO
score to determine your eligibility for credit and what interest rates
and other terms they should extend to you.)
But the credit-scoring models are designed to allow for mortgage
loans. The score ignores mortgage, auto and student loan inquiries made
during the 30 days prior to scoring. So if you find a loan within 30
days, the inquiries wonâ€™t affect your score while youâ€™re rate shopping,
according to MyFico.com. Also, the score looks at your credit report for
mortgage, auto and student loan inquiries more than 30 days old. If it
finds some, it counts those inquiries that fall in a typical shopping
period as just one inquiry when determining your score.
Deal only with a reputable lender.
Sellers now are looking much more closely at who the buyer s lender
is. To avoid instances in which the lender might not be able to deliver
on the loan, they want to see that any prospective buyer is working with
a financially sound and reputable lender. Most national brokerages and
banks have local branches, so buyers should ask a local realtor (and the
buyerâ€™s agent who is representing them) for recommendations.
To satisfy any doubts you might have about a particular lender, visit
the Better Business Bureauâ€™s web site to find out what kind of
reputation they have.
Watch the clock.
Preapproval letters and the documents they verify have expiration
dates. Those dates vary by lender, but the letters are typically valid
for 90 days. If youâ€™re still house hunting after, say, 60 days, and
youâ€™re concerned, ask your lender to re-validate the preapproval letter.
Sellers want to be sure the buyer s financial situation hasnâ€™t changed
since the time the lender initially checked them out. If any part of
your financial picture has changed, such as your credit, job status,
income or assets, for example you should notify the lender so your
preapproval can be adjusted.
If you are in need of lender recommendations, please let me know. I
work closely with two reputable lenders who will be more than happy to
Tyler J. Morrison