Understanding Pre-Approval

by | Jun 7, 2018 | Buying & Selling Info

Are you taking your first step into the world of home ownership? Or selling your current home to buy a new one? Whether you are new or pro, looking at different houses can be a lot of fun, but serious house shopping should start in the lender’s office, not out on the streets. Getting pre-approved for a home ownership loan will give you a better idea of what you can afford before you start looking and speed the process along when you’re ready to put that down payment on the table.

What is Pre-approval?

A Pre-approval on a loan is an estimate on how much you will be able to afford with a loan based on an extensive evaluation of your financial situation. This is done to better judge whether you will be a trustworthy candidate for any loan options. Pre-approval is an estimate only and does not guarantee you a loan until you are able to finish closing on a home. Make sure to avoid large purchases during this time until after the entire buying process is entirely finished. Your credit will be pulled for one last time before the loan is completely approved and is susceptible to damage from unchecked spending.

Why is it so important to have pre approval before house shopping?

When you budget for a home, you need to know how much you can afford to spend monthly on housing. Sometimes people will look for homes without knowing how much they can actually afford and how much of a loan they can get. When a person who isn’t pre-approved falls in love with a house and tries to buy, the process will be slowed down as they try to get a loan, and sometimes can be stopped altogether if they don’t qualify for the amount needed to cover the house. Getting pre-approved for a loan lets you know how much money you can finance for the house and will speed up the process of closing on the house you want.

How do you get pre-approved?

Since the economic crash of 2008, gone are the days of no verification and no documentation loans. Quite a bit more is required from a potential buyer in order to complete the pre approval process. Here are a few things you’ll need to get started.

Income Documents – You will need W-2 statements from the last two years of employment, recent pay stubs, any extra money received through alimony and bonuses, and your two most recent tax returns. The lender will take all of this into consideration for proof of income.

Documentation of Assets – If you have any assets such as investments, you will need to have bank statements and investment account statements. You will also need to have a gift letter ready if you have received money from a friend of relative as a gift.

Good Credit – Loan guidelines have become stricter in recent years, with the average required score being no less than 740. FHA loans also require a score of 620 or above. Those with a score lower than 580 will need to be prepared to pay more on the down payment in order to be approved.

Employment Verification – Your lender will need to see paystubs from your current employer as well as from a past employer if you’ve changed jobs recently. Lenders are also likely to call employers and ask a few questions. Those who are self employed can expect to provide more documentation on their businesses.

ID – Multiple forms of identification will be needed in order for your lender to pull your credit report. Be prepared to bring drivers license, social security number, and any other documents that might be needed.

Buying a house is a big step. Simplify the process by getting pre-approved before you hit the housing market. Get pre-approved through a lender of your choice and let The Lemmon Team help you take your first step towards your new home today!