The New Homebuyer Handbook | Terms to Know When Getting Pre-Approved for Your Loan
Come all ye first-time buyers! We’re kicking off this series to help better illuminate your journey toward homeownership and show you how to get from start to finish with some expert advice.
Figuring out where to start in the homebuying process can be overwhelming but even more so if you’ve never done it before. Assuming that you won’t be purchasing your first home in cash, you’re likely going to need to borrow a bit of money by applying for a mortgage loan.
Let’s start from square one: pre-approval!
If you don’t already know, pre-approval is the first step in the mortgage application process in which the lender of your choice has deemed you eligible to borrow money for the purchase of your home. Getting pre-approved for a mortgage will up your ranking as a buyer in the event of a bidding war when it comes time to put in an offer. Sellers will feel more secure accepting your offer knowing that your financial history is in check.
It’s important to have a solid understanding of your financial standing through the help of a lender before you start really house-hunting and accidentally fall in love with a home way out of your budget. Ask your Realtor® for lender recommendations. With their local expertise, it’s likely that your Realtor’s® preferred lender is also a lender that is trustworthy in the eyes of the listing agent.
Whichever lender you select will help guide you on what loan is most appropriate for you after assessing your collective financial history. With that said, it’s in your best interest to have the following things in order to ensure that you’re well prepared for the pre-approval process:
Basic Identification
Including but not limited to your driver’s license, social security number, etc. Anything the lender might need to prove your identity. They need to make sure you are who you say you are!
Credit History
Good credit is of course indicative of a trustworthy investee. Having a high credit score in the homebuying process gives you leverage to negotiate for lower interest rates and overall better loan terms.
Most lenders require a FICO credit score of 580 or higher to qualify for the 3.5% low down payment on a FHA loan.
Verification of Income
Plan on having a file of your W-2 forms, recent pay stubs, bank statements, and tax returns (federal & income) ready to go. All the lender is trying to get a sense of is that your income is steady to ensure that you’ll be able to meet monthly mortgage payments.
Verification of Assets
Keep in mind that there are extraneous costs beyond the monthly mortgage payment when taking out a loan. For example, closing costs and the down payment. Your lender will use your bank statements to verify that your money is coming from an approved source, and to ensure that you have a savings history in the event of any emergency.
Verification of Employment
Like your income, your lender wants to be sure you’re in good standings with your job. A steady job, and thus steady income, quantify reliable monthly payments back to your lender. Proof of employment might require the contact information of your employer to verify the salary that you provided.
Keep in mind that for first timers, often there are specialized new homebuyer assistance programs that can help you save money. Your lender will know of the most current programs, and which is the best fit for you, so don’t hesitate to ask!
Once you’ve been pre-approved, your lender will provide you with what’s called a “lender letter” as proof of the agreement. The letter will be submitted with your offer once you have your heart set on a house and decide to go for it. Do be aware that lender letters aren’t immortal. Because it varies among lenders, make sure your ask yours about its expiry date and if you’ll need to renew.
Check back soon for The New Homebuyer Handbook's run-down on reviewing disclosures and comparable sales when a home for sale has piqued your interest!