Pre-loan approval begins with finding a good lender and culminates with a letter stating your purchasing power. It is a must-have in many markets. Real estate agents ask because they know that many sellers will not take you seriously without having a mortgage lender sign on your credit and finances. The scope and accuracy of prequalify for a home loan varies depending on the lender and the information you provide. Prior approval is generally considered more reliable than the less involved prequalification letter, which requires less initial detail.
Double your effort with two lenders
A mortgage broker or loan officer can initiate prequalify for a home loan process with you in person, over the phone or online. Online mortgage lenders provide relatively fast results with a minimum investment of time from you. You can answer the lender’s questionnaire using your computer and download the vouchers. However, if you prefer to speak with and interview a single point of contact, work with a loan officer at a bank or mortgage brokerage. To get a second opinion of your loan qualifications, get pre-approved, with at least two lenders.
Factors analyzed for Preauthorization
Guidelines, loan terms and conditions of loan vary pre-approval by the lender and your individual financial conditions. However, there are some generally accepted rules you must meet to gain prior approval. To determine if you qualify for pre-approval, the lender analyzes you’re:
- the debt burden represented by a debt-to-income ratio
- minimum credit score and history
- employment history
These aspects of your finances work hand in hand. While you cannot excel on all fronts, having a healthy debt load and paying 20 percent, for example, can help you prequalify for a home loan, despite the less-than-excellent credit, with some lenders.
General guidelines to answer
Your DTI housing cost ratio, known as a front-end ratio, should be between 28 percent and 31 percent. Total monthly obligations, including housing, are expressed as a back-end ratio. The back-end ratio is usually not more than 36 percent, but can be as high as 43 percent. Lenders usually require FICO scores of at least 620 or 640. However, you may be able to get prior approval despite the credit is low with a higher down payment. Indeed, the amount you contribute from your own funds to buy a home shifts risk from the lender. Down payments range from 3 percent to over 25 percent, depending on the type of loan and the type of property.
Documents required for Preauthorization
Provide your lender with income and recent asset information. Needed paperwork depends on your situation. However, you generally have to provide:
- one month of pay slips
- the last two years of tax returns and W-2s
- two months of bank statements and three months of investment account statements
- recent profit and loss accounts and business licenses, if self-employed
Most lenders need to know exactly where your down payment has just made sure it does not borrow. They check for large or unusual filings and may require written explanations to document the source of your funds.
Cooperation with your lender and honesty are essential for a strong pre-approval loan. A pre-approval is a commitment to lend and it is subject to subsequent verifications and documentation, such as an assessment of the home. If the house or all aspects of your finances fall short of the lender’s requirements, you can no longer qualify for a loan. Be completely ahead with your lender and avoid making the following mistakes:
- do not disclose any additional income, employment, funds or tax deductions
- failing to disclose non-debts on your credit report, such as alimony or child support
- excessive spending, financing consumer purchases or taking new lines of credit
- borrow money from friends, family or other lenders
- distort any aspect of your financial situation