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Mortgage Preapproval Process: 5 Steps to Nail Down Your Loan

Whether they’re first-time buyers seeking a starter condo or seasoned investors purchasing apartment buildings, there’s one thing serious and successful homebuyers have in common: They nail down their financing before going property shopping.

Completing the mortgage preapproval process confers several advantages. For instance, you’ll learn what you can afford to spend on a home, which can make your search more efficient and focused. Preapproved buyers also may receive more respect and attention from those selling their homes, because preapproval is the next best thing to cash. A preapproved offer might even beat out a higher offer from an unprepared competitor. Finally, the preapproval process allows you to work out any unexpected questions or problems without the stress of a contract or a closing date.

Preapproval Is Not Prequalification

Prequalification usually requires answering a few questions about your income and down payment. A credit report might be pulled, for example, or a lender might accept an estimate of your credit score. A prequalification letter will provide the amount you can spend on a home based on your credit history, supporting documentation and other financial information, which may be subject to review by an underwriter.

Preapproval, also called credit approval, means you’ve applied for a mortgage and supplied all the documents an underwriter needs in order to approve you, the borrower. Once you have preapproval, you should be able to close on your loan, as long as the property you choose meets the lender’s guidelines.

Typically, you can prequalify in less than an hour, but preapproval may take more time.

The Five Steps to Preapproval

What will you need for the preapproval process? Only five simple steps are required to get the process moving:

1. First, you’ll need to find a lender and complete a mortgage application to be preapproved for a mortgage. Whether you go through a local bank, credit union, mortgage broker or national online mortgage lender, your lender will ask for information pertaining to your application. Your lender may also ask you to fill out a form like the Uniform Residential Loan Application (Fannie Mae Form 1003), which is an industry standard. You can prepare by checking it out ahead of time, so you’ll know what you’re going to be asked.

2. Second, if you’re a W-2 employee, you’ll list every job you’ve had in the last two years and provide your two most recent pay stubs. You’ll also need two years of W-2 forms. Then, you’ll sign a form giving the lender permission to verify your employment with your employer. If you’re self-employed or earn at least 25 percent of your income from commissions, you’ll be asked for your last two tax returns, and you might also need year-to-date financial statements. Afterward, you’ll sign an IRS Form 4506-T, Request for Transcript of Tax Return, which allows lenders to verify that any tax returns submitted with your application match the ones filed with the IRS.

For other sources of income, you must prove:

  • You’re entitled to receive it.
  • You’ll receive it reliably.
  • You understand it’s expected to continue for at least three years.

Whether you have investment income, pension or disability income, alimony or child support, these requirements apply. Proof of income can include: bank statements showing direct deposits, award letters for pensions, divorce decrees, copies of checks for alimony or child support, and tax returns for investment income.

3. Third, you’ll list the source of your down payment and back it up with documents. You must prove you have the right to use the money and that it comes from an acceptable source. For example, if the money is in a joint account with someone who’s not a co-borrower on the mortgage application, this person must sign a letter stating you have the right to use it. If your down payment is a gift, you’ll need a letter stating the money doesn’t need to be repaid. If it’s from a savings or investment account, you’ll need statements showing the money is there. If it’s from the sale of an asset, you’ll need proof of its value, that you owned the asset and that you sold it and deposited the money (for example, by supplying a bill of sale, a check and a deposit receipt).

4. Fourth, your credit should meet the lender’s guidelines. Before applying for a mortgage, pull your own credit report and clear up any inaccuracies. Be prepared to explain any blemishes, like why they happened and why they won’t happen again. If you have proof you don’t deserve a derogatory entry, give it to your lender. Lenders have access to a service called rapid rescore, which allows them to update your credit report and score in a day or two.

5. Finally, you have to prove that you’re you. Mortgage lending rules require every loan applicant supply proof of identification.

That’s it! The mortgage preapproval process is like many home improvement projects: the better your preparation, the better the outcome. For more advice on buying a home as well as a variety of listings, visit Owners.com.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Owners.com, Altisource or any other Altisource® business or entity. The foregoing content is not intended to constitute, and in fact does not constitute, financial, investment, tax or legal advice by the author, Owners.com, Altisource or any other business or entity.


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