During the home purchase process, there are a lot of firsts for a buyer. Other than real estate investors, most do not go through a home purchase or mortgage very often. Once the decision has been made to purchase a home, each buyer should learn the ins and outs of the home buying process. Even previous buyers need to relearn the process, but the most important and initial step to remember is to secure a solid mortgage pre approval. The best results in any endeavor come from a solid plan or road map. In a home purchase and mortgage loan, that means a thorough discussion and the approval process with a mortgage loan officer.
Importance of the Mortgage Pre Approval
Have you heard the term “junk in, junk out?” That phrase holds true in most areas of life, and mortgage loans are no different. For instance, some mortgage pre approval letters are like a game of telephone. The message is passed to the next person and the next. Finally, the end person tells what he/she heard and it is nothing like the original.
Lenders can be this way in the pre approval process. It is too common for a lender to ask very basic information, receive no documentation, and possibly not even pull credit to provide a pre qualification. This mortgage pre approval may sound good at the beginning like that initial story, but once under contract and the details start popping up, all of a sudden that approval looks nothing like the original. That piece of paper could be worthless.
Reading this, you’re probably thinking “Why wouldn’t someone get pre approved first every time?” You would be right, it should be the very first step. Now, we get that buying a home is a lot more exciting than the approval. There’s nothing wrong with window shopping online with houses. Yet, THE way to go is to become a strong, qualified, and prepared buyer. That begins with the mortgage pre approval and pre approval letter. Another key step in the process is for the buyer’s documentation to be reviewed.
Mortgage Pre Approval Documentation
Although lenders cannot require a borrower to provide documentation for receiving a loan estimate, why wouldn’t a buyer do this? So often, information provided on the loan application is erroneous and usually not on purpose. Buyers do not know how lenders calculate income, realize that large undocumented deposits are an issue, specific loan product guidelines, or other potential hazards. There could be a huge ticking time bomb in the documentation that would be much better to learn prior to going under contract. Even experienced loan officers are not mind readers and cannot know all the facts without reviewing documentation. As we mentioned in another recent article, “Why would you want to figure your qualification after signing a contract?”Get everything reviewed up-front!
So, providing documentation up-front can turn a weak pre qualification into a solid mortgage pre approval. Then, a buyer is able to shop with confidence knowing the price range, what price equals what payment, and more.
Common Documentation Includes the Following (Not all apply):
- Photo ID
- Most recent paystub
- Last 2 years W2’s and possibly tax returns
- 2 most recent bank, retirement, or other asset statements
- Rental reference
Keep in mind that not all approvals require all of the above. Often, only 1 year of W2’s are required or with active military, no W2’s are usually required. Yet, some buyer scenarios are more complicated and require additional documentation. This is one of the many reasons to know exactly where you stand up-front. Then, barring the loss of a job or issue with the home, there is a very high chance of the purchase closing.
“I haven’t found a house yet, so I will provide my documentation when I am under contract?”
Why would a buyer want to get an approval after being under contract? We hear the above so many times from buyers and even though we cannot require documentation prior to contract and disclosures, this is really setting a buyer, the Realtor®, and the seller for failure. That is why we provide education like this article. We want buyers to understand that not only their success is at stake, but also a seller is depending on them. Forgetting about how important this should be to the actual buyer, put yourself in the shoes of the seller. The seller is probably buying another house, packing up, hiring a moving truck, changing schools, and more based on the buyer’s qualification. Do not leave all of this to chance, hoping that everything will be ok.
10 Reasons for Mortgage Pre Approval Up-Front
- Know how much house you can afford – Learn more
- Do you need seller paid closing costs & how much – Learn more
- Compete better with other offers
- Shorten the mortgage process
- Quicker closings
- Be done during the due diligence period
- Handle issues before contract
- Get underwriter answers early
- If you don’t qualify yet, a plan can be developed for later
- Concentrate on other things
In a perfect world, a first time buyer would contact us to start the mortgage qualification process. We often see buyers who are already well into their executed contract before actually starting with the mortgage qualification. This could potentially be a recipe for disaster as it pushes the buyer into a rush to close quickly, make decisions quicker than they should.