Mortgage Pre-Approval When Buying a House

July 2, 2009

A mortgage pre-approval letter was very helpful for my wife and I when we started looking for houses about 8 months ago. My wife’s mom is a real estate agent, so she helped us every step of the way, but many agents won’t deal with buyers who aren’t pre-approved for a loan. They don’t want to spend a lot of their time to find out later that their buyer can’t qualify for a mortgage.

Buying a house, no matter what the market is like, should never be taken lightly. Owning a home isn’t always a good idea. You should only buy a house when you are financially and mentally prepared to go through with the biggest purchase of your life. Here are some questions to ask yourself before you start looking for houses with a real estate agent.

How much home can I afford?

Generally, about three times your gross pay is a good figure to start with. So, if you make $50,000 a year, you could look for a house somewhere between $125,000 and $175,000. Use this mortgage calculator to play with different purchase prices and mortgage types to see what your mortgage payment will be. If the payment exceeds 30% of your gross pay, then you should start lowering your target purchase price.

Where should I apply for a loan?

This depends on your situation and how much you are going to contribute to a down payment. If you shoot for putting 10% down, you’ll have a larger pool of options. Conventional loans from your big commercial banks typically require that you put down a 10% down payment and a stellar credit rating. They will give you prime rates and their fees have become more competitive since the housing meltdown. Credit unions are also a great option, but they also require larger down payments and good credit scores.

If you have a less than perfect credit score and you were planning on doing a 5% down payment, then consider applying for an FHA loan or for a loan from a wholesale lender. Mortgage brokers are better at offering these types of loans, because they can shop around between dozens of different companies. Just make sure that you don’t get nickel and dimed by the broker.

What’s on my credit report?

Before you start applying for a loan, request a copy of your free credit report from Equifax, Experian, and Transunion. If you are married, pull all three for you and your spouse. Make sure there are no mistakes on the credit reports. If there are, all three agencies now have an online system for credit report disputes. If you have any outstanding bad debts on your credit report, those most likely be required to be paid before you can close on the loan or get pre-approved.

What Documentation Do I Need To Provide To Get Pre-Approved?

  1. Copy of your driver’s license and social security card.
  2. Copies of all pay stubs from the past 30 days
  3. Bank statements showing all cash and investment assets
  4. Federal tax return W-2′s for the past two years.
  5. Any proof of other income such as alimony, child support, side business, etc.

There may be other documentation required later in the process or even for pre-approval, but these are the major documents required by most lenders for pre-approval.

The Advantages

You’ll be treated with more respect by buying and selling agents and they’ll be more willing to help you find the right home. Sellers will be more likely to accept your offer if they know that the deal will go through. You’ll also close more quickly, because the loan processing can be the part that hangs up a real estate deal the most.

Next up, interest rates and picking the right mortgage product.

Erik

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Erik
Erik Folgate is a husband and father living in Orlando who's been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.

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7 Responses to Mortgage Pre-Approval When Buying a House

  • Dokemion

    2010 was kinda a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.

  • Kevin Moncton

    I agree with this post. It would be better if house buyers could prepare their mortgage pre-approval letter for these could help them explain everything in their part to the house sellers. Also, it is very important that they asses their financial capability in having their house as well as secure all the requirements needed for it to easily be acquired. Also, it would be better if they could prepare a credit report for the seller to easily look into their financial capability of buying a house. To understand these things, it would be better to ask help from experts such as REALTORS® for this people could easily guide them in every step of their house buying journey. Thank you very much for this post!

  • marci

    Another option, if you are selling one house to move to another, is to get pre-approval on the to-sell house’s home equity line of credit. If you can pull enough cash out of the house, plus your cash on hand, you can pay cash for the new house. Then you pay interest only on the old house until it sells. Kind of helps out with that moving problem and saves all the new mortage paperwork costs.

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