Mortgage Pre-Approval Counts; Pre-Qualified Doesn't
Few things are more embarrassing or frustrating than picking out something you want to buy, taking it to the cashier, and then discovering you don't have enough money-or credit-to pay for it. It's even worse when that 'something' is a home.
One way to avoid the problem is to get pre-approved for your mortgage loan. This means your lender has verified all the information you provide -- salary, credit history, down payment amount, etc., - and gives you a letter showing you are pre-approved for a loan of up to a certain amount.
This is not the same thing as being pre-qualified, however, explains Chantell Myers, a loan processor for Kimberly Financial Services, in Gurnee, Ill. Although some lenders hand out letters saying someone is pre-qualified, those letters usually are considered useless and a waste of time because they are based solely on the borrower's word rather than on verified fact. 'We don't use them,' she says.
No lender will loan you a dime unless and until they can verify 'everything checks out.' In fact, many real estate agents won't even show you a home until 'everything checks out' because they don't want to waste their time showing houses they aren't sure you could afford to buy. Since you will have to have to make sure that 'everything checks out' before you can get a loan, you might as well get that "hard" approval before you start house hunting. You definitely don't want to delay starting the pre-approval process until you have found that perfect home. It could take a month or more to get a pre-approval letter and by the time you have it, the house might have been sold to someone else.
In order to get pre-approved, you will have to back up everything you tell the lender: your credit history, pay stubs or IRS W2 forms, bank statements, brokerage or investment accounts, and other paperwork. If you are self-employed, the lender will probably want to see your last three tax returns. If a large amount of money recently 'appeared' in your bank account, the lender might want to know where it came from. If you say it was a gift from family, for example, you will likely have to provide a letter from the giver saying that it is a gift and not a loan. If it was a loan, you will have to pay it back, which changes your debt load. They will also want to know how large of a down payment you plan to make, how long you've been at your job, how long you have lived at your current residence, what your monthly bills are, and so on.
'The (pre-approval) letter will state what the conditions are, or what's been verified,' Myers adds. It will say how much the lender who issued it is willing to loan you. By the way, you do not have to borrow the full amount a lender offers. Just because a lender is willing to loan you $100,000 or $500,000 doesn't mean you have to borrow all of it. You should focus on the home you want to buy and the size of the monthly payment you can comfortably afford to make.
The letter will also tell you how long you have to access the money. With some companies, the letter is good for 120 days. For others, it is less. So you do want to work on getting that pre-approval letter before you start house hunting.
'The biggest hang-up in getting pre-approved is usually the credit score -- the FICO. And that's based on the credit report,' Myers explains. If there are mistakes in your credit history, you have to ask for a correction. You have to deal with the credit-reporting agency and, sometimes, with the company that made the mistake. In any case, it can take 30 days to get a mistake corrected.
Since you can never be sure which of the three major credit reporting agencies a lender will use, it makes sense to check your reports with all three companies and make sure all three are accurate. You can order your credit file from any of the big three credit reporting agencies: Equifax (800) 685-1111 or online at www.equifax.com; Experian (888) 397-3742 or www.experian.com, and TransUnion (800) 888-4213 or www.transunion.com. You are entitled to one free copy per year of your credit report from each of the reporting agencies. And it is also possible to get all three credit reports from any one of the three agencies. You also can get your credit reports by going to Interest.com and clicking on 'Free Credit Report.'
Once you are pre-approved, do not make any major purchases until after you sign the papers for the house, and try not to change jobs. Lenders will sometimes run a final credit check before the loan closes to see if you bought a new car or made any other big-ticket purchases that would make a major change in your monthly bills. They might also check to see if your income has remained stable. If changes have been made and the lender decides you can no longer afford to make the anticipated monthly mortgage payments, the company will cancel the loan. After all, the loan isn't final until the check has been deposited and the last piece of paperwork has been signed.
Myers says that lenders do not always perform a final credit check, 'but they always have the option to do that. So do not use any more credit than you have to while you are in the process of buying a home.' That will help you avoid the potential embarrassment and frustration of not having enough money to pay for your dream home. After all, you want to make sure that when you do find the home you want and can afford, the lender will be there with the check you need to pay for it.
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