When you decide to finally buy a house, you shouldn’t go house shopping immediately. You should instead go to a mortgage professional who will guide you through the process. He will help you decide on your budget with regards to your income, debt, credit, and expenditure.
While buying a home you have to go through certain phases, one of these phases being the approval process. This is one of the most tedious processes when you want to get a mortgage. In this guide you will find everything you need to know about the approval process, starting with Pre-Qualification.
- Improving Chances of Getting Accurate Results
- Final Mortgage Approval
- Things to Remember
During the approval process, getting pre-qualified isn’t necessary, but is helpful in getting a rough idea about your budget. Pre-qualification is a letter from your lender, which tells you the estimated loan you qualify for with regards to their guidelines. The estimation is from your self-reported credit and income information.
This will prevent you from getting into a loan that you cannot afford and look for homes that meet your criteria. Getting pre-qualified also shows that you are committed to buying a house, this makes the lender more serious towards your case. Showing your lender that you are pre-qualified can strengthen your offer as it shows you can afford the mortgage.
Despite the many benefits, most people opting for a loan do not go for a pre-qualification. This is because a pre-qualification doesn’t Guarantee you the mortgage and in some cases is a wrong estimate. Due to lenders glancing through your reported documents, the real outcome during pre-approval could be very different. Many lenders don’t even consider credit information during pre-qualification, which can lead to more inaccurate estimates.
Seeing how your loan changes greatly based on your credit score, as it influences your interest, the results can be different when the lender approves the final amount. With that said, it is also very hard to get pre-qualified. Unlike a pre-approval, a pre-qualification is possible on the phone or online, and you don’t have to wait long.
Improving Chances of Getting Accurate Results
While it may be hard to get pre-qualified, it’s even harder to get accurate results. Since buying a house is the single biggest investment people make, the misleading information could result in a wrong decision. However, you can also avoid the misleading information by following these steps:
- Credit Information: By correcting errors in your credit information and addressing any late payments or arrears, you can bring the decision in your favor. Moreover, this doesn’t just help your pre-qualification, it will also give you better interest rates for your loan. In some cases, lenders refuse to provide offers for people with bad credit history.
- Decrease Debt: Many lenders prefer a debt-to-income ratio of 36% or less. The most allowed is 43% and any higher, the lender may deny your offer. To find your debt-to-income ratio, consult a professional or check a debt-to-income calculator.
- Increase Down Payment: By increasing the down payment, you can reduce your monthly payments and secure the offer from your lender.
Regarding lending, pre-approval means a potential customer who is worthy of a credit product. In simple terms, pre-approval is like a letter of recommendation to a lender that instills faith in them to give you a loan. These changes followed, after the 2008 financial crisis, which caused a recession and nearly collapsed the world financial system.
The financial crisis was in part due to the housing sector giving mortgages very easily even to those who couldn’t afford it. Unlike pre-qualification, a pre-approval can guarantee a loan. During pre-approval, the lender may ask for certain documentation, which will help in determining your qualification for the loan.
Other than being very hard to obtain it is more reliable than pre-qualification. The main reason for pre-approval being more reliable is that the documentation check is a lot stricter. For instance, they will look at your extensive credit history. If you have a good credit score, the lender will have more confidence in giving you the loan.
Furthermore, this will speed up your home buying process tenfold, as a file is already open with your lender, which contains all your relevant information. If need be, your lender may ask you for more information on short notice, in that case, it’s good to keep your files organized. Your realtor will see that you are serious about purchasing a house, which will put you in good terms with them. Sellers are more favorable towards people with pre-approvals, hence making you more likely to secure the house.
You must remember that the only thing guaranteed to you by a pre-approval is the interest rate, all other factors could change. This is not necessarily a bad thing, seeing how you will be safe from rising interest rates in the future. In the case where interest rates fall, your lender will offer you the lowest possible offer.
Moreover, if they go up, you will maintain the original amount guaranteed to you. Many financial institutions don’t offer pre-approval seeing as how for them it’s sometimes not worth the time and money. The same can be said about the two terms, as pre-qualification and pre-approval are used interchangeably so read the terms and conditions carefully. Nevertheless, you should be careful while choosing your lender as they may be a fraud or might have misleading terms.
Now to the most important part of the approval process, both pre-qualification and approval, hinge on documentation. If the documents given are false or forged, your lender can take action by suing you. If your documents are authentic, and in order, you can get a good offer compared to those with incomplete documents. Here are some of the documents you will require:
- Proof of liabilities
- Child support
- Co-signed or guaranteed loans
- Lines of credit
- Student loans
- Car loans
- Credit card balances
- Existing mortgages
- The account numbers and locations of your bank accounts and investments
- Proof of assets, such as
- Retirement savings accounts
- Investments and interest income
- And other property holdings
- The lender will require proof of company employment, through a letter of recommendation or a bank slips. These should be up to date with the previous or current month.
- A record of all income statements, for example, a personal income tax, t-4 slip or paystub is required. This applies to self-employed workers and freelancers as well.
- Photo ID
After they receive your documents your approval process will begin with the pre-approval. It will nearly take 120 days for the approval process where you will get a response about your requested offer. After that, you may begin the hunt for the house of your dreams.
Final Mortgage Approval
When you receive your pre-approval, it is necessary that you do not bring any drastic changes in your life. For instance, losing your job or getting another loan will affect your cash flow, which will affect your proposal. Even simple things like switching jobs can affect your approval for the worst. This means that you must keep your finance as stable as possible. If you manage to stay financially sound during the pre-approval, then congratulations, you are halfway through your loan.
To complete the process al that is left is to pay for the property. After you make arrangements through the mortgage loan application, your lender will arrange an appraiser to check the current value of the house. This is to ensure that you are not overpaying for your house, but more importantly to check if they aren’t lending you more money than the actual worth of the house. Moreover, if you are not able to pay 20% of the down payment and want mortgage insurance, then the property must also qualify for mortgage insurance. A federal housing authority must give the mortgage insurance given to the house.
In the case where you make changes to your financial stability, your lender will update your information accordingly. Changes made to your credit score income or debit will add to your proposal.
Things to Remember
Now that you have gone through the guide and you understand the terms and conditions, you are ready to buy a house. However, here are some things that you must keep in mind while going through this process:
1. The Hunt Can Wait:
When you have decided that you are buying a home, don’t go house hunting without an estimate on your current budget. Someone to help you with this would be a mortgage broker, and never hesitate from asking for their assistance. Considering this is probably the single biggest investment you are going to make you will need all the help you can get.
2. Pre-Proposal or Pre-Approval:
In any case, you should get both done. First is the pre-proposal because that will help you make a more clear decision. True that the pre-proposal doesn’t take into consideration your current credit history, but it does look at your other income. By looking at your current income and debt-to-income ratio, they can show you what to expect. Pre-approval comes after the pre-proposal. This is because it shows the lender, realtor, and seller that you are serious about purchasing the property.
Documentation is the most important part of your mortgage proposal, whatever you do not give away false information. Due to extensive background checks and research, all financial institutes can find out whether or not the documents are fake. Therefore, it’s not worth the risk. You should also clear up any bad debt that is remaining as it can remove your offer from consideration entirely. You should also make sure that your documents are organized in a place that is easily accessible. Seeing how often, lenders can ask for additional information, you should keep all your relevant information somewhere accessible.
In conclusion, while this may be quite the hassle, no price is too big to pay for a good home.