If you're even considering purchasing a home in the next year, the time to start the pre-approval process is now. Why so early? Here's some advice to get you on track to a smooth purchase transaction. While you don't want to actually apply for the loan until your are ready to make an offer on a home, working on the pre-approval process allows you to address any concerns that crop up on your credit report, save for extra downpayment, and know how much you can afford before you fall in love with that out-of-reach house.
House hunting without knowing how much mortgage you can be approved for is like a novice making a cake without following a recipe. It might turn out okay, but more likely it will be a disaster.
In a competitive market, you might find the perfect house, but can't make an offer on it because you don't know if it's even in the ballpark of what you can afford. That house could slip through your fingers because other—more prepared—buyers know what fits their budget or overall financial situation, and can make the offer at once. Many sellers, or their agents, reject offers from potential buyers that do not have a preapproval letter from their bank. When the buyer has a preapproval letter, the lender has already verified the borrower's information, documentation, employment history, income and credit. Even though the preapproval is not an actual loan commitment, it is farther along than without it, and can shorten the underwriting process and loan approval process.
Just because a friend, co-worker or family member got approved for a certain amount, that doesn't mean you'll qualify for the same amount, even with a similar credit profile. In fact a survey by NeighborWorks America discovered that while 40 percent of new homebuyers seek advice from family, friends and acquaintances, only about 16 percent seek advice from a real estate professional early in the process.
Going through the preapproval process allows you to take a look at all the potential impediments to getting approved for the loan you need for the home you want. Here are some potential pitfalls to getting approved:
- Past credit history — a prior bankruptcy, foreclosure or short sale will hamper your new purchase. If you disclose this information to your lender up front, they can direct you toward special loan types, information or instructions that can improve your chances.
- Shopping for additional credit — applying for a vehicle loan, credit card or other form of credit can lower your credit score by adding so-called "hard inquiries." Actually obtaining credit after you have received a pre-approval letter is unwise as well, since lenders often check your credit again prior to the actual loan approval. Adding new debt count against you qualifying for a mortgage.
- Undocumented deposits — since part of the approval process involves 60 to 90 days of bank statements, any large, out of the ordinary deposits made into your bank accounts must be accounted for. This means that a family member cannot "temporarily loan" you money to give the appearance that you have more money on hand in order to get a loan approval. If your family intends to "gift" you with money toward your down-payment, they will need to provide a letter as affidavit that the funds are a gift and not a loan that will have to be repaid.
- Changes in employment — changing positions, employers, compensation structures (from hourly to commission, for example), or other situations can affect final approval for a loan. Make sure to keep your lender in the loop if your boss offers you a different position, or an invitation to your dream job comes at the same time you're shopping for a new home.
- Any other changes to your finances can affect your mortgage approval either positively or negatively. The one that affects it the most, however, is being less than truthful with the lender. If they discover the untruth — and most likely they will — your chances of getting a loan plunge drastically.
Seek professional advice
As your real estate professional, we can steer you in the right direction before you get too far in the process of home shopping. We know lenders that can meet your needs and give you direction on which types of loans might work for your situation. Call us to get started today.