What does it mean to get “pre-approved” for a loan before looking at homes?
This article is a free resource in the Home Buyer University course offered by Life & Legacy Properties.
Getting pre-approved for a loan means speaking with a mortgage loan officer who reviews your personal finances and deems you qualified to borrow a specific maximum amount of money to buy a home.
Part of this process involves submitting documentation like paystubs, bank statements, and tax returns — and consequently obtaining loan pre-approval commonly takes buyers between 24 hours and 7 days.
It is important to obtain this pre-approval PRIOR to touring homes so that you know you can afford the homes you’re looking at.
A pre-approval will typically involve review of four main financial criteria:
1) Income
A mortgage lender will need to know how much money you make, how long you have been making it, and how your income is structured (base pay, commission, overtime, bonuses, etc.).
Regardless of income, it is generally more complicated and the criteria are more strict for a self-employed home buyer to qualify for a mortgage than for a salaried employee.
Note: No matter how you are compensated, you must be fully transparent and honest with the lender about your income.
2) Debt
A lender needs to know about all of your debt so that they can calculate your Debt-to-Income (DTI) ratio — how much you earn per month compared to how much you spend on debt payments, like student loans, car loans, child support, credit cards, etc.
Different types of loans accommodate a higher or lower DTI.
3) Credit Score
I cover this in more detail here, but a lender will need to “pull” your credit score for an official review.
Click image for link to Credit Scores article.
Most buyers have credit scores from the three main agencies (Equifax, Experian, and TransUnion), and each agency’s score commonly varies slightly.
A mortgage lender will use the middle of the three scores. For a solo buyer, this is simple.
If, however, two or more parties (perhaps a husband and wife) are buying a home together, the lender is required to use the middle score of the lowest-scoring individual.
That is why all involved parties need to build and maintain strong credit scores.
4) Down Payment
A buyer needs to establish how much money they have available for their down payment and where that money is coming from.
Is it coming from a savings account? A down payment assistance program? An inheritance? A family gift? (read more on downpayment options here).
As a buyer you have options.
Whether your downpayment is 3% or 25%, all money in the transaction needs to be eligible and documented.
After a lender is able to fully review all four of those criteria, they can issue you a loan Pre-Approval (a slight variation of this is called a loan Pre-Qualification) and you’re ready to begin home shopping!
Watch the video version of this article on Instagram (@LifeandLegacyProperties)
Questions? Email me here.
