In today’s housing market, it’s no secret that the number of buyers searching for their dream home greatly outnumbers the inventory of homes for sale. This has created a competitive marketplace where buyers need to do all they can to stand out. You can show home sellers and real estate agents you are serious about buying your dream home by getting pre-approved for a mortgage before starting your search.
The first step in getting pre-approved is completing the loan application provided by your lender. You’ll need to submit documentation of your financial history, including income, assets, and debts. You should expect to provide at least the following documents:
- W-2 statements
- Bank statements
- Credit report
- Tax returns
- Place of residence
- Self-employment documents
Benefits to Getting Pre-Approved:
1. You’re a more powerful buyer
Real estate agents and sellers will see you as a serious buyer when you have the backing of a lender. Pre-approval means a lender has looked at your financial background and determined how much home you can afford.
2. Save yourself some time
Getting pre-approved can also save you valuable time by identifying how much you can afford, so you can target your home search to your price level. This also allows you to focus on the features of the home rather than worrying about the price tag.
3. Better bargaining power
With a pre-approval letter in hand, you will likely have more negotiating power because sellers and real estate agents know that you have already talked to a lender and you mean business.
4. Reduce surprises
Talking to a mortgage consultant before finding your perfect home can help ensure you’re not surprised when it’s time to make an offer. Getting your ducks in a row early will leave little room for unexpected surprises, such as a black mark on your credit report or debt-to-income ratio when you find the home of your dreams.
5. Typically shorter closing periods
A pre-approval can help to speed up the closing process, since much of your financial information is already collected and in the lender’s system.
The Four C's
If you’re nervous that you may not qualify for a mortgage, it helps to know what’s important to your lender. According to Freddie Mac, your lender is evaluating the four C’s to determine how much you may be qualified to borrow:
Capacity: Your current and future ability to make your payments
Capital or cash reserves: The money, savings and investments you have that can be sold quickly for cash
Collateral: The home, or type of home, that you would like to purchase
Credit: Your history of paying bills and other debts on time
If your lender determines that you qualify for a loan, they’ll provide you with a pre-approval letter outlining the maximum amount you are qualified to borrow. Keep in mind that the amount your lender is willing to lend is not always how much you should borrow. You should only borrow what you feel you are comfortable repaying. Also, pre-approvals are usually good for a limited time, so be sure to discuss this with your lender.