If you’re like most people, whether you’re looking for a home for sale in Alys Beach, a condo in Destin, or a home on a large parcel of land in Santa Rosa Beach, you’re going to need financing to make such a big purchase – and that means it’s a good idea to get mortgage pre-approval before you even start house-hunting.
Why You Need Mortgage Pre-approval Before You Start Looking for Homes
If you’re pre-approved, you’ve already been through the steps required to be approved. You’ve given your lender your pay stubs, tax returns, and other documentation it needs to determine whether you’re actually qualified to borrow money. A pre-approval is the lender’s way of saying, “As long as your financial situation stays the same as it is today, we’ll give you this amount of money to purchase a home.”
The added benefit is that you know exactly how much you can afford to spend on a house. You don’t have to waste time looking at homes that are out of your price range.
When it’s time to make an offer on your dream home, you can tell the seller that you’re pre-approved; the seller will then be able to take your offer more seriously than he or she would if it came from someone who hadn’t secured financing.
Pre-approval vs. Pre-qualification
When you apply for mortgage pre-approval, you’re asking your lender to look at your credit, your income, and your entire financial picture to let you know whether you qualify to borrow money to buy a home.
That’s not the same as prequalification. Prequalification is simply the lender saying, “Okay, if you make as much money as you say you do, and if your credit score checks out, we’ll probably be able to lend you the money.”
What You Need for Mortgage Pre-approval
Mortgage pre-approval requires your lender to pull an official copy of your credit report, and you’ll probably have to sign a consent form allowing it to do so. You’ll also have to supply documentation that proves your income, including:
Tax returns. Your lender will probably request your last two tax returns so it can make sure your annual income is accurate based on the pay stubs – and to make sure there aren’t big fluctuations in what you make year-by-year.
Pay stubs. Most lenders want to see two or three pay stubs. Your pay stubs help your lender figure out exactly how much you make in a month, but things can get tricky if you’re self-employed or have other sources of income (like alimony or child support). You’ll have to provide additional documentation to prove other types of income, such as 1099s or receipts of direct deposits.
Bank statements. Lenders want to see your bank statements (even if you’re borrowing from the same bank where you stash your cash) to confirm how much money you have put away for future mortgage payments, as well as how much you keep in your accounts. They also check to see if your down payment has been in your account for some time or if it suddenly appeared one day.
Proof of other assets. Your lender will want to see proof of life insurance, investment assets and other assets. If you have something unusual, ask your lender what constitutes proof so you can bring in the right paperwork.
Gift letters. If your family or friends have given you money to help you buy a home, you’ll need to show your lender written confirmation that the money was a gift and not a loan.
Canceled checks to your landlord, if you’re a renter. Some lenders want this type of proof so they can verify that you’re able to pay rent on time, so they may ask for a year’s worth of your canceled rent checks or some type of documentation from your landlord.
How to Prepare for Pre-approval
Because lenders use your credit report to figure out whether you’re likely to repay a loan, it’s important that you credit score is as high as possible before you apply for pre-approval.
Start by getting a copy of your credit report. Thanks to the Federal Trade Commission, we’re all entitled to one free copy of our own reports each year. (You can get yours here.) You can also use free services such as Credit Karma to see where you stand.
If you find any errors on your credit report, dispute them immediately with the agency reporting them. Each of the credit reporting agencies – Experian, Equifax and TransUnion – have an online dispute resolution center where you can submit proof that there are errors on your report.
Now is a good time to start paying down your debt, as well. The less you owe your creditors in relation to the amount of credit they’re willing to extend to you, the better.
Pro tip: Most credit experts advise against closing accounts. Lenders want to see a good, healthy mix of credit on your credit report, which can show them that you’re adept at managing your money with multiple lines of credit.
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About 30A Local Properties:
30A Local Properties is located in Grayton Beach, FL and services the South Walton community. The team of locals confidently offers the experience of over six hundred South Walton real estate transactions, nearly three decades of banking experience in commercial and residential property holding positions, and over a decade of entrepreneurial real estate experience in property investments and management. Visit our website at www.30alocalproperties.com or stop by our office and meet the team:
30A Local Properties
35 Clayton Lane, Suite B
Grayton Beach, FL 32459
P: (850) 213 3048
F: (850) 213 0035