Pre-approvals for mortgages – What you need to know
In a busy housing market, most people know that before you even go out to look at houses, you need to get a written pre-approval for financing. While you may have checked your credit scores recently, your scores don’t tell the whole story about your credit history. The truth is that since the recent recession and the consequent tightening of lending standards, there are many people out there with credit scores between 650-750 who do not qualify for a home loan. A prior bankruptcy, foreclosure or short sale could have your dream of home ownership on hold until the mandated waiting period. And those with old collections and even old judgments will have to pay those old debts prior to obtaining a pre-approval too.
In a sellers’ market, it is not uncommon for sellers to receive multiple offers on their homes. When this happens, sellers may opt to basically ignore offers that are not accompanied by a pre-approval (or proof of funds for cash buyers).Of course sellers are looking for the most money they can make on their homes, but their decisions are also based on the likelihood that an offer will actually close. For sellers, nothing says serious buyer more clearly than a signed pre-approval from a lender (on lender letterhead).
Your pre-approval process is usually fairly easy and with most lenders pretty fast too. You will need to provide (at a minimum) the following information to your lender:
- 2 months most recent pay stubs
- 2 months bank statements – all pages included (If pulled online, statement must show your name on the on the paperwork.)
- last 2 years tax returns – all pages and all schedules
- most recent 2 years W2s or 1099s if self employed
Your lender will pull a tri-merge credit report (all 3 credit bureaus) to determine the amount and type(s) of financing that are available to you. Most lenders will use the mid-score from the 3 bureaus.
Not only do sellers require pre-approvals; your realtor needs this information as well.
- We want to show you properties that you are qualified to purchase.
- We need to know if, for example you are looking for FHA financing, that the property is FHA approved (many condos are not FHA approved, so why look at them?)
- Once you find a house you want, we need to be able to present as strong an offer as possible.
- We frequently communicate with your lender, usually even prior to finding you a home, so we need that contact information as soon as possible.
Your pre-approval is usually good for 90-120 days. Once you have an accepted offer your lender will require all new updated documentation, AND your credit will be re-pulled at that time too so please read on.
Managing your credit after you receive a pre-approval
Once you have your pre-approval from a lender, it is important that you manage your use of credit wisely. Most lenders should tell you:
- DO NOT apply for any additional credit cards after your pre-approval is issued.
- DO NOT make any large purchases ($100 or more) on existing credit cards.
- DO NOT change jobs or give notice to your current employer. In fact, don’t use online services to search for a new job. Lenders are wise to all the online services, and often check social media sites to see what you’re up to that the loan application does not cover, and they do this just before the loan is scheduled to close.
- Make sure that you pay all creditors on time.
- Don’t file for a divorce or formal separation prior to closing a loan. Even if your spouse or partner will not appear on your application or loan, the legal ramifications of a divorce will affect your ability to finance a purchase.
Applying for new credit, large purchases on existing cards, and missed payments to creditors WILL lower your credit scores and will reduce the mortgage amount you qualify for.
You really should be using the time prior to home shopping to do any mortgage shopping before getting a pre-approval. Once you have an accepted offer with a seller, the Oregon contract does clearly spell out that you must notify the seller if you’ve changed lenders after mutual acceptance of your offer.
The credit bureaus allow up to 3 mortgage inquiries within a 90 day period without a 6 point drop in your scores for each inquiry. New sources of credit will lower your scores considerably more than 6 points.
If you know that you will need a new refrigerator for you new home, you have to put these purchases on hold until after your loan closes. You really can manage 1 or 2 days without a new refrigerator or washer/dryer or that big flat screen TV you now have the perfect wall for.
Virtually all lenders will pull a credit update and will verify your employment just before your loan is scheduled to close. Any negative changes to your credit scores, increases in your credit balances, or iffy news about your employment can kill your loan at the last minute.