Pick the Right Lender
Owners.com Buyer Handbook
Loan Pre-Qualification vs. Pre-Approval
You will hear these two terms used interchangeably; however, there are very
significant differences between being pre-qualified for a mortgage and pre-approved for a
mortgage. This distinction can make the difference between knowing your contract is solid at
the beginning of the transaction or having it fall apart in the middle.
Being pre-qualified for a mortgage
essentially means the buyer has spoken to a loan officer or has made online
application for pre-qualification. Generally speaking, the buyer has provided their income,
their debts, their assets and, usually, their social security number for a credit check. The
lender then runs the credit check, computes the debt to income ratios based on the
information provided and gives a nod to pre-qualification. This pre-qualification is subject
to all information being verified and found satisfactory to the lender. This is where potential
difficulty is possible. For instance, if the buyer provided information about their income that
seemed right to them, but the lender calculates the income a different way (usually in the case
of self-employed or commissioned individuals), the income will not hold up and the loan can
possibly be rejected. Or if a buyer provides an asset amount to be used for down payment and
closing costs and it is later discovered that the buyer is borrowing the money from his father.
The buyer thought the money would simply be counted as his, but the lender doesn’t accept this
source of funds. The loan could ultimately be rejected.
Pre-qualification is a step in the right direction,
but it is only a step.
Pre-approval, on the other hand, actually requires the buyer to provide all the
necessary verification to support the loan application. This generally includes bank statements,
pay stubs, W-2 forms and a credit report. When the lender issues a pre-approval, it is just that,
an approval. It is subject only to the buyer finding an acceptable property within the pre-approved
price range and having a satisfactory appraisal completed. Of course, problems could still crop up
with the appraisal, but a pre-approval is a much stronger and more certain position. Most lenders
are happy to issue a pre-approval within a few days of loan application.
Apply for a Loan
The first step in getting the money you need to buy your next home is pre-qualifying
for a mortgage loan. By pre-qualifying, you will have an approximation of how much lenders may be
willing to lend you, based on the preliminary information you will provide.
Having this information can help narrow your home search to homes that you are
most likely to be able to afford.
Information Needed at Loan Application
Most lenders will need the following information at the time of application. The
more prepared you are, the smoother and faster your application can be approved. The lender may
have additional requirements. (This is a general list.)
If you are salaried:
- 2 years W2's
- 1 month of most recent pay stubs
If you are self-employed or commissioned:
- 2 years tax returns
- Year-to-Date Profit and Loss or evidence of year-to-date earnings
Down Payment & Closing Cost Verification
- 2 months most recent bank statements
- 2 months most recent stock statements
- 2 months history on other asset accounts
- Copy of your purchase agreement if you have chosen a house
- Money for appraisal and credit report