The Buyer’s Journey: Getting the Loan
A few weeks ago, I wrote an article about being mentally prepared before buying a house. If you do not plan on paying cash for your next home, another important step in the Buyer’s Journey is to get pre-approved for a loan. Finding a trustworthy lender is just as important as finding an awesome real estate agent, but since you’ve already found me, I’ll focus this article on the loan process and why pre-approvals should be completed as soon as possible.
Pre-approval Credit Checks & Benefits
One of the first conversations I have with my clients is to encourage them to get pre-approved so they know exactly what they can afford. It can sometimes be a touchy subject because most buyers feel they already know what that number is and maybe more importantly, the buyer is concerned that a pre-approval involves a credit check that will negatively affect their score. While credit scores can take a hit, realistically it’s only a handful of points and should not deter you from the pre-approval process. I also advise my clients to shop multiple lenders to achieve the lowest rate and lender fees. Now you might be thinking: that’s a handful of points times the number of credit inquires by each potential lender so now the credit impact could be astronomical! But did you know that Credit Bureaus expect rate shopping? Therefore, most scoring formulas treat multiple credit inquiries within a certain time frame as one credit pull. If you feel less worried about your credit score being damaged, would you want to shop with a more defined budget? Having a pre-approval gives you the added benefit of writing a stronger offer when you find the right house. Submitting it alongside an offer tells the seller that you are a serious buyer who is close to obtaining an actual mortgage.
Pre-qualification versus pre-approval
So far I’ve only addressed pre-approvals. I’m sure you’ve heard of another term floating around called pre-qualification. There is a distinct difference between the two processes and once you understand what it is, you’ll see why I recommend getting pre-approved over getting pre-qualified. A pre-qualification is often described as the first step in obtaining a loan, but in my opinion, it can be skipped altogether by going straight to a pre-approval.
A pre-qualification is an interview with a lender, and can often be accomplished over the phone or on the internet. It is a simple and quick procedure that gives borrowers an idea of what they would qualify for, but it is not a guaranteed amount.
A pre-approval is a much more involved process that requires documentation and an extensive review of the borrower's financial history and credit rating. From this information, the lender is able to provide a letter with an exact mortgage amount that has been approved, the interest rate, and fees/discount points. More importantly, a pre-approval is required in getting your offer accepted.
Once the offer is accepted and escrow opens, buyers typically have 21 calendar days to finalize the loan and to remove the loan contingency. This period moves quickly so it’s important to have all your documents in order to begin the loan application. This is the basic loan checklist required for each borrower:
- Acceptable identification (driver’s license, passport, green card)
- All pages of W-2s and federal tax returns, including all schedules, for the last 2 years
- Pay stubs covering the last 30 days, which may overlap multiple pay periods depending on your company’s pay frequency
- All pages of your bank, investment, and retirement account statements for the last 2 months, and a written explanation of any irregular deposits (large bonus, gift money)
- Contact for your homeowner's insurance
Additional documents are needed if you are self-employed, have ever declared bankruptcy, recently sold your previous property, pay child support or alimony, or have a current mortgage. It’s very important to submit all requested items by the loan officer within 24-48 hours.
AVOID, AVOID, AVOID
During the loan process, it is also advisable to avoid certain activities as they will affect your ability to qualify:
- Buying high cost items such as cars, appliances, furniture, electronics. Don’t furnish the house until you own it!
- Increasing or decreasing your liabilities by opening or closing credit cards.
- Changing employers or job industries. Don’t pass up a better career opportunity, but let your lender know as soon as you decide to begin your search, or if you receive a pay promotion or large bonus.
- Depositing large sums of money without proper documentation. If you receive gift funds from your family, let your lender know.
- Moving assets across accounts without proper documentation.
- Judgements against you - while this is not as common, we do live in a litigious society and if you are in the middle of a lawsuit (including small claims), let your lender know immediately.
If you need an in-depth consultation on your unique financial situation or just want to speak with some experts on the loan process and learn additional tips, I’d be happy to recommend some lenders!