Before making an offer on a house in today’s real estate market you will need to get a Pre-Approval Letter from your lender.
A pre-approval letter is a commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information. Most pre-approval letters are good for 60 to 90 days.
Marcus McCue, Executive Vice President for Guardian Mortgage Company says, “The Dodd-Frank Consumer Protection Act, which was signed into law in July 2010, has forever changed the housing market landscape. Designed to restore consumer confidence in the housing industry, the law has created strict regulatory mandates, the impact of which are being felt by both mortgage lenders and mortgage seekers.”
McCue goes on to say, “The new requirements outlined by Dodd-Frank have a large impact on how the approval process will work. No longer will pre-qualifying suffice for new home buyers; the new rules of the game dictate pre-approval when it comes to a successful home buying experience.”
While there are many reasons to get pre-approved, one of the more important reason to get pre-approved early in the process of buying a home is that you will get an accurate idea of how much you can afford. This will ensure that you only look at houses that are truly in your price range. While I may get A LOT of disagreement from other Realtors and lenders, a financially responsible guideline for determining how much home you should finance includes finding a home you can buy with a down payment of at least 10% on a 15-year (or less) fixed-rate mortgage and limit your monthly payment to 25% or less of your monthly take-home pay. (More on that in a later post)
A pre-approval letter is also essential in today’s seller’s market. If you make an offer on a house without a pre-approval, your offer will not be taken as seriously as an offer with a pre-approval letter and you may lose the bidding war for the home of your dreams. Additionally most bank-owned homes will require a pre-approval letter from a lender before accepting an offer.
When preparing for the pre-approval process here are few basic guidelines to follow:
- Ensure you have documented proof of stable income for the past two years.
- Ensure you have a credit score of 720 or higher and/or no derogatory incidents for the past 12 months to ensure access to all loan programs and options.
- Understand the down payment requirements. The down payment must be documented in your account and any large down payments will need to be documented with a paper trail. Having a safe full of cash isn’t good enough… The paper trail indicating where the money came from is that important!!!
- Understand that a gift from a family member must be documented with a gift letter, verification of the source of the gift funds and proof the gift has been provided to the recipient.
- Ensure you have all required supporting documentation prior to entering the pre-approval process. Some of those documents may include:
- Your W2’s from the past two years
- Your pay stubs for the past three months
- Your tax returns from the past two years
- Your checking or savings bank statements for the past three months (this will likely have your down payment funds in them as well)
- Your statements for all your other assets (stocks, bonds, retirement accounts) for the last two months
- The name and phone number of your landlord (if you are renting) or your current mortgage documents
- Your divorce decree, if applicable
- If you are self-employed: Your business tax returns for the past two years in addition to your year-to-date profit and loss statement and year-to-date balance sheet.
The new Dodd-Frank approval requirements necessitate home buyer to be better prepared for the pre-approval process. Preparing ahead of time will make the entire pre-approval process run smoother and ensure a more timely decision from your lender.
If you can not get pre-approved by mortgage lenders, there are three areas you will likely need to work on.:
- Correcting any errors on your credit report and raising your credit score
- Decreasing your overall debt and improving your debt-to-income ratio, and
- Increasing your down payment amount in order to qualify for the price of the house you want
Our preferred lenders are happy to answer your questions and work with you to get the best rates and payments. Just click these links to get the approval process started online with our preferred loan originators…