During the height of> the real estate boom, getting a mortgage was as easy as picking out a new coffee table for the living room. Now, home buyers have to jump through rings of fire before they can sign on the dotted line.
Today, the first step in landing a home loan is obtaining a letter of preapproval. This means a mortgage lender has verified that you re approved for a mortgage of a certain amount over a fixed timeframe.
Preapproval letters are prepared even before you ve picked out your home. They remove some of the uncertainty in the home-buying process. In the current housing market, real estate agents and sellers won't want to work with buyers unless they have one.
Before you even get in my car, you want to get preapproved, says Gerry Bourgeois, a real estate broker and president of Towne & Country Realtors in Leominster, Mass.
With a letter in hand, buyers know exactly how much they can borrow and therefore how much house they can afford. A preapproval letter shows the seller and the seller s agent that the buyer is capable of buying their house. For most sellers, the issue is not whether they can get an offer, but whether they can close the deal, says Tara-Nicholle Nelson, a real estate broker in Oakland, Calif.
Agents see preapproved buyers as more serious (and more valuable) because they ve taken proactive steps to secure a preapproval. When it s time to make an offer, a preapproved buyer will be in a better position to negotiate.
Here s what home buyers need to know about the new rules of mortgage preapproval.
Shop around. And shop early.
When seeking preapproval, talk to a few different mortgage lenders to find the best mortgage package that suits your needs. Two or three lenders is customary, says Brad Blackwell, a national sales manager at Wells Fargo Home Mortgage in Danville, Calif. More aren t necessary to get a good deal because loan packages are generally very similar and pricing tends to be comparable, he says. And consult with lenders before you start house hunting. This way, you ll know how much you can borrow and which houses are in your price range, says Ann Stickel, vice president of affiliated services at Michael Saunders and Company, a real estate brokerage in Sarasota, Fla.
Prepare your financial biography.
Getting preapproved means a lender must review and verify a home buyer s income, credit and assets to ensure he can make the necessary monthly payments on a house. In the wake of the housing bust, borrowers must be more forthcoming when it comes to their finances, Stickel says. Your lender should tell you precisely what you need, but be prepared to include:
- W2 statements (or 1099 income statements) for the last two years
- Federal tax returns for the last two years
- Bank statements for the last few months
- Recent pay stubs and proof of other income
- Proof of investment income
Know you're not obligated to one lender.
Preapproval doesn t bind you to a particular lender; it s just a promise -- albeit, a conditional one -- that the lender is willing to make the loan. The buyer isn t obligated to borrow from that lender.
A preapproval will stipulate the loan amount or monthly payment but not necessarily the loan type or rate. When you apply, lenders use that day s mortgage rates to estimate costs and payments. Just don't expect them to keep the same rate they preapproved you with as the actual rate that will be available when you find a property and sign a purchase contract, says Danny Valentini, a senior vice president and regional manager at Homeservices Lending, a mortgage lender in San Diego.
Keep an eye on your credit score.
Usually, a loan inquiry can ding your credit score. If you applied for a bunch of credit cards within a short period of time, for example, your FICO score might fall. (Most lenders use some version of the FICO score to determine your eligibility for credit and what interest rates and other terms they should extend to you.)
But the credit-scoring models are designed to allow for mortgage loans. The score ignores mortgage, auto and student loan inquiries made during the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping, according to MyFico.com. Also, the score looks at your credit report for mortgage, auto and student loan inquiries more than 30 days old. If it finds some, it counts those inquiries that fall in a typical shopping period as just one inquiry when determining your score.
Deal only with a reputable lender.
Sellers now are looking much more closely at who the buyer s lender is. To avoid instances in which the lender might not be able to deliver on the loan, they want to see that any prospective buyer is working with a financially sound and reputable lender, says Blackwell. Most national brokerages and banks have local branches, so buyers should ask a local realtor (and the buyer s agent who is representing them) for recommendations.
To satisfy any doubts you might have about a particular lender, visit the Better Business Bureau's web site to find out what kind of reputation they have.
Watch the clock.
Preapproval letters and the documents they verify have expiration dates. Those dates vary by lender, but the letters are typically valid for 90 days, Blackwell says. If you re still house hunting after, say, 60 days, and you re concerned, ask your lender to re-validate the preapproval letter. Sellers want to be sure the buyer s financial situation hasn t changed since the time the lender initially checked them out. If any part of your financial picture has changed your credit, job status, income or assets, for example you should notify the lender so your preapproval can be adjusted.