For those who are starting to think about buying and financing a home, whether it’s for your very first or you’ve been a homeowner for years, you know the importance of having your financials in order. At the same time there is no shortage of information regarding mortgage programs and interest rates online but as such sometimes too much information makes the buying and qualifying process much more confusing than it has to be.
Over the years the mortgage industry has made some major changes. Gone are the days of so-called “toxic” loans and the lenders who made them. Today, loans are approved using traditional underwriting guidelines. Borrowers can be expected to provide documentation of their income with pay check stubs or income tax returns. Bank statements are needed to show there is sufficient cash to close along with having some cash reserves left over in the bank account. Credit needs to be reviewed. The period leading up to the mortgage meltdown in 2008-2009 didn’t take into account very much of any documentation. There were loan programs that didn’t require income to be verified at all. Whatever the applicant put on the loan application was what the lender used. Later, even these “stated” loan programs began to change into loans that didn’t require any income information to be listed on the application.
Back then, it was easy to get a prequalification letter from a lender. Most anyone could get prequalified over the phone by a loan officer as there were loan programs that could finance almost anyone in any type of situation. But today, a prequalification won’t get you very far in today’s market. It’s the first step, but not the only step.
For example, you can call me up on the phone and we’ll discuss your current situation. We’ll talk about your job and how long you’ve worked there. I’ll ask about how much money you make each month and if there is anyone else that’s going to be on the loan with you. If so, I’ll need to know about that person’s employment and income information as well. One important note regarding income, if any income you receive represents more than 25 percent of your overall gross monthly income then we’ll need to review your last two years of federal income tax returns. For self-employed borrowers, income is calculated by averaging this income over a 24 month period plus year-to-date income. Don’t worry, you don’t need your tax returns for a prequalification but you do need to have a good idea about how much you bring home every month.
I’ll also ask about you and your coborrower’s credit history. When you send in your loan application we’ll pull a credit report but for purposes of getting prequalified we just need a general sense of what your credit looks like. With this information we’ll then look at available loan programs and current interest rates, calculate a monthly payment and compare this payment with your gross monthly income. We’ll also add your mortgage payment with any other monthly credit obligations such as a car loan or credit card payments and compare that total with monthly income. These two figures represent your housing debt ratio and your total debt ratio. I can then send your prequalification letter. But as I said, a prequalification letter isn’t going to help very much when it’s time to go shopping for a home and making an offer.
It’s no secret that home values have not only recovered over the past few years but are on the rise. Homes that you’re looking at will be more expensive the longer you wait. The current real estate market is seeing sellers receiving multiple offers as buyers compete with one another for the same property. You need every advantage you can garner and while a prequalification letter gives you an idea what you can qualify for, it won’t help when making an offer. You need the next step- a preapproval.
A preapproval letter is a prequalification that has been verified using information provided by third parties. Instead of you and I speaking over the phone I’ll ask that you go ahead and send copies of your most recent pay check stubs covering a 30 day period. You can also expect to provide those copies of your bank and/or investment statements showing you have enough funds to cover your down payment, closing costs and cash reserves. If you’re self-employed, it’s time to find your last two years of income tax returns and forward them to me along with a year-to-date profit and loss statement. Your P&L doesn’t have to be certified or otherwise prepared by your accountant, you can put one together on your own. There will also be a form you’ll need to sign that authorizes our company to pull a credit report and credit scores. Loan programs today do require a minimum credit score.
Upon receipt and review of your application and supporting documents along with your credit report, we can then issue your preapproval letter. Sellers today, and especially their real estate agents, know what to ask when making an offer as it relates to financing. One, sellers want to know if you’ve spoken with a lender. Two, they want to know if you’ve applied for financing and if you’re preapproved. Your preapproval letter which will accompany your offer answers both those questions.
Put yourself in the seller’s shoes for a moment. If you’re a seller and you receive two offers and one has a preapproval and one does not, which do you think the seller will take. And, if you’re selling your current home and buying another, don’t you want to know if the buyers are not only qualified to buy and finance your home but they’ve already taken the steps to get a preapproval? If you get an offer and you see a letter that states they’ve applied and their application and credit have been preapproved doesn’t that make you feel a little bit better about accepting their offer?
When markets start to heat up and there are more buyers out there, a simple prequalification letter won’t hold very much water. You need to take the next step in today’s market.