How To Get Pre-Approved For A Home Purchase
Buying a home, needless to say, costs a lot of money, and unless you have hit the jackpot, literally or figuratively, you will need a loan to be able to purchase the home. And in order to to get a loan, you need to get pre-approved. It can be quite an involved process, so let’s make sure you know how to get pre-approved for a home purchase.
Pre-qualified vs Pre-approved
Aren’t they the same thing? No. It is important to distinguish the difference and make sure you are pre-approved for a home purchase, not just pre-qualified. Pre-qualification is the mathematical process of figuring out what your mortgage payments would be based on your financial situation. It is important to know this of course but is just one small step towards pre-approval. Using a mortgage loan calculator, you or a lender could figure this out for you relatively quickly.
The pre-approval letter from a lender will help the home buyers show the home seller they are serious with their offer.
However, pre-approval is a much more involved process, where a lender will analyze your financial situation, determine what you will be able to afford a mortgage payment, and approve this plan for you, essentially giving the permission of the bank that they will loan this money to you as long as your financial situation doesn’t change, and assuring the seller that you are a serious and credible buyer.
How Do I Get Pre-approved For A Home Purchase?
Now that you know the importance of getting pre-approved for a home purchase, let’s talk about the steps you need to take to make it happen. Lenders are looking for specific things when it comes to your pre-approval, so make sure you have these bases covered.
Lender will explain the process on how to get pre-approved for a home purchase.
- Mortgage application: First thing’s first. You will need to apply for a mortgage through a lender. Expect an application fee here. If you have not made an offer on a home yet, disregard the “property” section of the application. It is important to try to lock in your interest rate, and if you choose to use the same company as your lender, they will most likely lock it in for you.
- Proof of income: A very important element of the application is the proof of income. Even if you have money in the bank, a lender will need to know that you have a healthy stream coming in to continue to make your payments in the future. There are multiple ways to provide proof of income and you will most likely need to do more than one of them. One way is to show pay stubs for the last few months, as well as your year-to-date income. You will also be required to showing statements from all of your bank accounts, usually over the last quarter. Next, you will need to show W-2’s and tax returns from the last two years. Lastly, you will be required to show bonuses, alimony, and other debts.
- The income and career changes may impact the loan approval process. Make sure you disclose it to your lender in a timely manner.
*TIP – try to avoid large debt payments, as they are seen as risky for lenders and will affect the size of loan you can attain. Pay them off if you can, and if you can’t, don’t take on any new loan payments once you decide to apply for a loan.
- Proof of assets: It is important to illustrate to the lender that you are financially stable and that you will be able to make your monthly mortgage payment, but they also need to see that you have enough money saved up to survive the purchase out of the gate. You will need to show them your bank and investment accounts, to prove that you have enough money for closing costs as well as the down payment. Any money that you receive from family or friends must be accompanied by a notarized letter, stating that the money is a gift and absolving from any obligation to pay it back. Once all that is done, the lender will do a credit check.
- Lender will request the buyer to provide a proof of income and assets.
- Credit check: The credit check is a crucial part of the pre-approval process, and it will largely determine your mortgage rate. A great credit score is usually 720 or above, and that will earn you the lowest interest rates. You typically must have at least a 580 in order to get a standard loan with 3.5% down payment. If you have a lower score than this, you may still be able to get a loan but will have to make a bigger down payment. If you have a lower credit score, check Home Loans For All to find a lender that works with borrowers with low credit scores.
- Review credit report is one of the first steps that lender proceeds in order to get buyers pre-approved
*TIP – Closing credit accounts out of the blue can cause a hit to your credit score, even if you’ve already paid them off. On the other hand, opening up too many credit accounts too quickly can also put a dent in your credit score. Stability is key to maintaining a solid credit score, so stick with what you already have and pay it off as quickly as you can.
- Verify ID and employment: Of course, it is important for the lender to verify all of this information and cross check it with your identification and employer. You will need to provide your ID, social security number, and employment record, and your lender will contact your current employer (and possibly your previous employer) to validate all the information you have given them.
Home buyers should know the process on how to get pre-approved for a home purchase in Chicago prior to shop for their dream home in Chicago.
The pre-approval process can be daunting, but hopefully, you have been planning to buy a home for a while and have your ducks in a row. Having a pre-approval is an essential element of making your offers to sellers credible, and may be the nudge you need to get considered before other buyers who are only pre-qualified. Your agent should be able to walk you through the steps to prepare you for your mortgage application and answer any questions you might have.
Real Estate Agent can provide a list of trusted lenders who can advise on how to get pre-approved for a home purchase in Chicago.
If you are ready to make this power move, contact The Delphine Team with Baird and Warner to make sure you have everything you need on how to get pre-approved for a home purchase, so that you can show the potential sellers out there that you mean business.