Before you start shopping for a home, you need to work with a lender to get pre-approved for a mortgage. Pre-approval is basically a promise from the lender that you're qualified to borrow up to a certain amount of money at a specific interest rate. This promise is subject to a property appraisal and other conditions. It is smart at this point to review your credit score and report profile first -- this can be done totally free with our Credit Report Card in less than 2 minutes. This will give you a more accurate sense of what type of rates you will qualify for.
In the pre-approval process, the lender looks closely at your credit and verifies your income (as opposed to pre-qualification, for which your information is not verified). The lender then gives you a pre-approval letter, which says that your loan will be approved once you make a purchase offer on a home, and once you submit the following documents - the purchase contract, the preliminary title information, the appraisal, and your income and asset documentation. Keep in mind, though, that pre-approval is not an absolute guarantee that your loan will be approved.
Pre-approval means that the lender is confident that you can make the necessary down payment and that your income is sufficient to cover the mortgage payments. At this stage, only one concern remains. The lender needs to make certain that the property's value offers sufficient collateral in relation to the loan amount. In other words, the home must be appraised for an amount more than, or equal to, the purchase price.
When you're ready to make a purchase offer, both your real estate agent and the seller will want to see a pre-approval letter. This proves that you're likely to be able to make the purchase and, therefore, you can be taken seriously. In a competitive housing market, sellers prefer a pre-approved buyer to those who, for all anyone knows, might be unable to close the deal.
Before you roll up your sleeves and look into the details of getting pre-approved, you should first understand all three basic stages of the mortgage application process: pre-qualification, pre-approval, and mortgage commitment.
Getting pre-qualified is an informal process in which you are interviewed by a mortgage professional about your income and expenses. This gives you a general idea of the price range you can afford. It really doesn't bring you any closer to securing a mortgage.
When you are pre-approved for a mortgage, it means that a lender has looked closely at your credit report, your employment history and your income and has then determined which loan programs you qualify for, the maximum amount that you can borrow, and the interest rates you will be offered. Be aware, however, that your loan representative is not the one who will ultimately approve your loan. That is the underwriter's role, and these days underwriting is automated. In order for your loan representative to submit your application for pre-approval, you must provide your last two years' tax returns and W-2s, your most recent pay stubs, bank account statements, and a signed authorization to order your credit report. The automated underwriting system will deliver a pre-approval letter within minutes, and will list any conditions that need to be met for full approval.
A lender will issue a loan commitment after it has approved both you and the property you intend to purchase. Having examined all of the necessary documentation to verify your ability and willingness to repay the loan, your loan representative will submit your complete application to the underwriter. The underwriter will return one of four decisions: approval, approved with conditions, suspended (which means they need more documentation from you before they can make a decision), or denied.
The process of getting pre-approved is actually quite simple. All you have to do is provide your lender the documentation that they require. Be prepared to supply your loan representative with pay stubs, bank account statements, tax returns and W-2 forms from the previous 2 years, and documents to show other sources of income (which could include a second job, overtime, commissions and bonuses, interest and dividend income, Social Security payments, VA and retirement benefits, alimony, and child support). Beyond that, the ball is in the underwriter's court.