A Friend In The Business
5 Things You Need to Be Pre-approved
1. Proof of Income
"No verification" or "no documentation" loans are a thing of the past, so you need to be prepared with W-2 statements from the past two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses and your two most recent years of tax returns.
2. Proof of Assets
You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs, as well as cash reserves. Your down payment, expressed as a percentage of the selling price, varies by loan type. Most loans come with a requirement that you purchase private mortgage insurance (PMI) or pay a mortgage insurance premium (MIP) or a funding fee unless you put 20 percent (or more) down.
In addition to your down payment, pre-approval is also based on your FICO(credit) score, debt-to-income (DTI) ratio and certain other factors, based on loan type. All except jumbo loans are conforming, meaning they conform to GSE(Fannie Mae and Freddie Mac) guidelines. Some loans, such as HomeReady (Fannie Mae) and Home Possible (Freddie Mac), are designed for low- to moderate-income homebuyers or first-time buyers. VA loans, which require no money down, are for U.S. veterans, service members and not-remarried spouses. If you receive money from a friend or relative to assist with the down payment, you may need a gift letter to prove that the funds are not a loan.
The chart below lists common loan types and the basic requirements for each one; you'll see how different the requirements can be. In the DTI Ratio column where two figures appear the first refers to housing-only debt and the second refers to all debt. Under PMI/MIP/Fee, two numbers separated by a slash (/) indicate an upfront fee followed by an annual fee (paid monthly). All mortgage loans have additional requirements not listed here.
3. Good Credit
Most lenders require a FICO score of 620 or above to approve a conventional loan and some even require that score for an FHA loan. Lenders typically reserve the lowest interest rates for customers with a credit score of 760 or above. FHA loan guidelines allow approved borrowers with a score of 580 or above to pay as little as 3.5-percent down. People who have lower scores must make a larger down payment. Lenders will often work with borrowers with a low or moderately low credit score and suggest ways they can improve their score.
The chart below shows your monthly principal and interest (PI) payment on a 30-year fixed interest rate mortgage based on a range of FICO scores for three common loan amounts. Note that on a $250,000 loan an individual with a FICO score in the lowest (620-639) range would pay $1,491 per month, while a homeowner in the highest (760-850) range would pay just $1,247, a difference of $244 per month or almost $3,000 per year.
4. Employment Verification
Your lender will not only want to see your pay stubs, but will likely call your employer to verify that you are still employed and to check on your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Lenders want to make sure they are lending only to borrowers with stable employment. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
5. Other Types of Documentation
Your lender will need to copy your driver's license and will need your Social Security number (SSN) and your signature allowing the lender to pull a credit report. Be prepared at the pre-approval session and later to provide (as quickly as possible) any additional paperwork requested by the lender. The more cooperative you are, the smoother the mortgage process will be.
Next Steps
Once you have gathered all the required documentation, it is time to look and apply for the best mortgage rates in your area.
The Bottom Line
Consulting with a lender before you start the home-buying process can save a lot of heartache later, so gather your paperwork or print some recent statements off your online bank accounts before your pre-approval appointment and before you begin house hunting.