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. 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
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. 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.
Keep an eye on your credit score.
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. 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. Most national brokerages and banks have local branches, so buyers should ask a local realtor for recommendations.
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. Sellers want to be sure the buyer s financial situation hasn t changed since the time the lender initially checked them out.