The number one piece of advice for homebuyers in today's market is to get preapproved before you start looking for a home. While a mortgage preapproval doesn't guarantee a purchase, it does give you an idea of how much you can borrow, your monthly payment and documented proof to a seller that you can qualify for financing.
Most Realtors won't discuss properties with you until you have a mortgage preapproval.
Preapproval vs. prequalification
Senior loan originator Peter Boyle recommends discussing financing with a mortgage lender about four months before you start actively looking for a home.
"If you apply for a loan early you have an opportunity to work on things that need to be changed or shored up without a gun to your head," says Boyle.
Lenders vary in how they handle a preapproval. Some still offer an initial prequalification rather than a preapproval.
"There are three pieces that make up a mortgage approval: your credit, your income and your home equity or down payment," says Aiman Abozeid, a mortgage branch manager.
"When you prequalify someone for a loan, your loan originator will check your credit and ask you about your income and your down payment. If your credit is acceptable, a lender can give you a prequalification and an idea of the amount you can borrow."
A preapproval, says Abozeid, takes this a step further and runs your financial information through an automated underwriting system that checks your credit and debt-to-income ratio and generates a preapproval letter if you qualify.
The requirements for preapproval vary by lender and your individual circumstances, but typically you'll need to provide:
- 30 days of pay stubs
- Two years of federal tax returns
- 60 days or a quarterly statement of all asset accounts including your checking, savings and any investment accounts
- Two years of W2s
"If you have any unusual income or circumstances, you'll need to provide other documents," says Boyle. "For instance, if you're divorced, I need to see a decree. If you filed bankruptcy, I need a full copy of the discharge documents. If you have rental income, I need a copy of the lease."
In addition to paperwork, your preapproval session with your lender should include a discussion about your down payment and loan options.
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