Anyone who wants to buy a house should get pre-approved for a mortgage. It’s not required, but it shows sellers you’re serious.
In today’s hot real estate market, buyers need to make themselves stand out from the competition as much as possible, and that’s one of the best ways to do it. Plus, a pre-approval letter sets your budget and gets one step of the mortgage loan process out of the way.
Before we get into what you’ll need to obtain pre-approval for a loan, let’s clear up two terms that often get mixed up – pre-approval and pre-qualification.
- A pre-qualification letter provides an estimate of how much you can afford if certain conditions are met, and it’s relatively easy to get.
- A pre-approval letter shows that a lender is willing to lend to you and how much. It’s much more concrete and valuable to you as a buyer.
Here are seven things you’ll need to show a lender to get pre-approval.
1. Identification
First, the lender will want to verify your identity. Any government ID such as a driver’s license or passport will do.
You’ll also need to provide a copy of your Social Security card so the potential lender can run a credit check on you later. Plus, showing ID helps prevent fraud in general.
2. Proof of Income
Lenders want to know you can pay off the mortgage with a reliable income. So they’ll usually want to see two years of your income history.
Be prepared to share two years worth of W-2 statements and federal tax returns. If you can’t find them, ask your employer, tax accountant, or even the IRS if necessary.
Some lenders will also want to see recent pay stubs (usually from the last 30 days). If you don’t get physical pay stubs, request electronic copies from your employer.
If you have any additional income, be sure to show proof of that as well. For example, if you receive alimony payments, be prepared to present the court order or divorce decree.
3. Proof of Employment
Proof of employment often goes hand in hand with proof of income. On top of your pay stubs, however, lenders may want to see a letter of employment; or they might even request your employer’s contact information in order to speak with them directly.
If you are self-employed, you’ll need to do some extra work to show you run a stable business. Lenders want to know the nature of your operation, its location, financial health, and sometimes more, to gauge whether you will generate sufficient income throughout the mortgage period.
Be prepared to show profit-and-loss (P&L) statements, 1099 forms, and at least two years worth of tax returns and tax schedules.
4. Proof of Assets
Lenders also study your assets. They do this to confirm you have enough money for a down payment, closing costs, and cash reserves.
Be ready to show bank statements from your checking and savings accounts. This will also help lenders uncover any red flags such as bounced checks or large deposits from a questionable source.
In addition, you’ll need to share statements from any retirement or brokerage accounts. That includes any IRAs, 401(k)s, stocks, bonds, and mutual funds.
If you own other real estate, be sure to include it. For example, perhaps you own rental units that a property management company helps you run; they’ll want to know about those.
In short, disclose any and all assets you own.
5. Debt Statements
Lenders also want to ensure you don’t already carry too many debts. They determine this by measuring your debt-to-income (DTI) ratio.
Typically, your DTI needs to be below 36%, but some lenders allow a max of 43%. Either way, the lower your DTI, the better.
In order for the lender to determine your DTI, you’ll have to disclose all of the following:
- Rent or mortgage
- Auto loans
- Student loans
- Tax liens
- Credit cards
- Personal loans
- Large medical bills
- Any other kind of debt
6. Credit Report
When you apply for pre-approval, you give the lender permission to run a credit report on you. Be aware that this is a hard inquiry and may temporarily lower your credit score—but only slightly.
Most lenders require a credit score of 620 or higher. But if you get a 3.5%-down FHA loan and pay private mortgage insurance (PMI), your score may go as low as 580.
In any case, the higher your credit score is, the better. Just a few points could alter the interest rate on your loan and save or lose thousands of dollars after the full term of your mortgage.
7. Other Documents
Depending on the situation, lenders may want to see other additional documents.
For example, if you’re currently renting, lenders may ask to go over your rental history to see you’ve paid your rent on time. They may even ask for your landlord’s contact information to verify that you have been a responsible tenant.
Perhaps a family member or friend might hand you money to use for the down payment. In that case, you’ll have to provide a gift letter signed by the donor to certify that the money is not a loan. Otherwise, this would affect your DTI and could affect the terms of the mortgage.
Finally, if you’ve ever undergone a foreclosure or been bankrupt, that information must be disclosed, so lenders can determine whether enough time has passed for you to qualify for a mortgage.
Wrapping It Up
That’s it! Those are all the items you need to get pre-approved for a house loan. Remember, the more you cooperate with your lender in handing over the information they request, the faster you’ll get your pre-approval letter and may buy a house.
Start gathering the above documents now, and you’ll be better prepared to engage sellers and close a deal.