Sheryl Simon's Blog
Buying your first home can be stressful enough without worrying about whether or not your mortgage loan pre-approval is going to go through. You may not be prepared for the mountains of paperwork that you'll need to submit before a lender gives you the thumbs' up. That's why it's such a good idea to know the requirements before you narrow down your home search.
Here are the top items your mortgage broker or lender will need in order to pre-approve you for a loan.
1. Proof of Income
W2 employees will need paystubs, IRS 1040 forms, and copies of their W2 form for the last two years.
For self-employed individuals, and small business owners, the burden of proof is higher. In additon to 1099 MISC forms, you may need to submit a letter from your accountant stating that your business is still active and a profit and loss sheet.
2. Asset Information
In addition to the regular taxable income you are bringing in, the lender will want to see proof of other assets, including savings, investment accounts, and written documentation of a family member's intent to gift you money.
These assets will let the lender know if you can afford a down payment, pay for the closing costs on the loan, and have enough cash reserves to afford the transition into homeownership.
3. Employment Verification
Lenders want to know not just that you are employed but also that you are stably employed. Thus, they request a letter from your employer to verify your employment status and the salary you're earning.
Self-employed individuals will need to submit at least two years of their complete 1040 forms in lieu of this verification process.
4. Credit Information
Before they will pre-approve a loan, the lender makes a hard inquiry into your credit. You will need a credit score of at least 620 to qualify for a conventional mortgage loan or a Federal Housing Administration Loan with zero percent down. The government may approve borrowers for an FHA loan with a score between 580 and 620 if they are able to make a sizable down payment.
In order to qualify for the lowest interest rates available — typically the ones you see advertised — you must have a credit score of at least 760. In some cases, it is worthwhile to defer applying for pre-approval until you can raise your credit score. Why? A lower interest rate can save you tens of thousands of dollars over the life of the mortgage.
5. Personal Information
Finally, the lender will want to verify your identity by requesting copies of your driver's license, social security number, and signature.
Thinking of buying a home in the near future? You're going to need a preapproval. This tells real estate agents that you're serious about the home-buying process, and it alerts sellers that you're a solid, low-risk candidate. Preapprovals aren't always easy to score, however. And if you're someone who's had a few credit issues in the past, you may need to improve your credit score before your dream of home-ownership becomes reality.
Here's a checklist of best practices for prepping your credit to gain a preapproval:
Check Your Credit Reports
Before you ever approach a lender for a home loan preapproval, make sure you know what's on your credit reports. You're entitled to one free credit report each year from each of the three different reporting agencies:
Order credit reports for yourself and for anyone who will be a co-applicant on your home loan, and then scour your reports for inaccuracies.
File Immediate Disputes Over Inaccuracies
Any discrepancies you find should be reported immediately. It's an easy process of reporting the issue to the credit bureau and waiting while they go back to the creditor to verify what you've claimed. In most instances, the inaccuracy will be removed within a week or two, though you may have to produce receipts as proof of payment.
Contact Creditors to Offer Settlements
Make a list of old, unpaid debts that are valid and set aside the funds to pay them off, one by one. If you have cash-in-hand, call creditors and ask them to settle for a portion of the balance in cash. Some may be willing to work with you, others may not. But it never hurts to ask.
Pay Current Bills On Time
Stay current on existing accounts. Make sure everything is paid on time, from credit cards to car payments, to ensure you don't lose points on your overall score while you're working toward credit restoration.
Pay Down Your Debt-to-Income Ratio
Your debt-to-income ratio is an indicator of how responsibly you use your credit. The lower your ratio, the easier it will be to obtain a preapproval. Pay down big balances. The more credit you're able to free up, the more attractive you'll look to potential lenders. Prepping your credit to gain a preapproval is surprisingly easy, but it requires the funds necessary to pay off outstanding debts and to pay down current balances.
Start early if you suspect there are items on your credit report that require fixing, and be patient as things circle back around. Credit repair is not an overnight fix, but with steady progress, it won't be long until you have a preapproval for your new dream home.
Whether you’re a first time homebuyer or a seasoned homeowner, the terminology of mortgages can be confusing. Since buying a home is such a huge financial decision, you’re also going to want to make sure you understand every step of the process and all of the conditions and fees along the way.
In this article, we’re going to explain some of the common terms you might come across when applying for a home loan, be it online or over the phone. By learning the basic meaning of these terms you’ll feel more confident and prepared going into the application process.
We’ll cover the acronyms, like APRs and ARMs, and the scary sounding terms like “amortization” so that you know everything you need to about the terminology of home loans.
ARM and FRM, or adjustable rate vs fixed rate mortgages. Lenders make their money by charging you interest on your home loan that you pay back over the length of your loan period. Adjustable rate mortgages or ARMs are loans that have interest rates which change over the lifespan of your loan. You may start off at a low, “introductory rate” and later start paying higher amounts depending on the predetermined rate index. Fixed rate mortgages, on the other hand, remain at the same rate throughout the life of the loan. However, refinancing on your loan allows you to receive a different interest rate later down the road.
Amortization. It sounds like a medieval torture technique, but in reality amortization is the process of making your life easier by setting up a fixed repayment schedule. This schedule includes both the interest and the principal loan balance, allowing you to understand how long and how much money will go toward repaying your mortgage.
Equity. Simply state, your equity is the the amount of the home you have paid off. In a sense, it’s the amount of the home that you really own. Your equity increases as you make payments, and having equity can help you buy a new home, or see a return on investment with your current home if the home increases in value.
Assumption and assumability. It isn’t the title of a Jane Austen novel. It’s all about the process of a mortgage changing hands. An assumable mortgage can be transferred to a new buyer, and assumption is the actual transfer of the loan. Assuming a loan can be financially beneficial if the home as increased in value since the mortgage was created.
Escrow. There are a lot of legal implications that come along with buying a home. An escrow is designed to make sure the loan process runs smoothly. It acts as a holding tank for your documents, payments, as well as property taxes and insurance. An escrow performs an important function in the home buying process, and, as a result, charges you a percentage of the home for its services.
Origination fee. Basically a fancy way of saying “processing fee,” the origination covers the cost of processing your mortgage application. It’s one of the many “closing costs” you’ll encounter when buying a home and accounts for all of the legwork your loan officer does to make your mortgage a reality--running credit reports, reviewing income history, and so on.
If you’re ready to buy a home, you probably have done a lot of research. One thing is sure: You know you need to get pre-approved for a mortgage. It’s perhaps the most critical step in the process of buying a home for a variety of reasons. There’s down payments and debt-to-income ratios, and other financial issues to worry about. You need to know what type of mortgage you should get. To help you understand what kind of mortgage you need, you should get pre-approved.
Understand The Pre-Approval Process
There are many misconceptions about pre-approvals. First, buyers need to understand that there is a difference between a pre-qualification and a pre-approval. A pre-qualification merely scrapes the surface of your financial state, while a pre-approval goes through everything a mortgage company will need to grant you a loan. You may be pre-qualified for a much higher amount than you can actually afford, for example.
A pre-approval is a lender’s written commitment to a borrower. The approval states that the lender is willing to lend a certain amount of money for a home. The lender obtains the following from the buyer:
- Employment history
- Credit report
- Tax returns
- Bank statements
The time and effort that it takes to get a pre-approval is worth it because everything will be ready for the lender to grant the mortgage once an offer is made on a home. It also gives the buyer an upper hand in finding the home of their dreams. Many sellers require a pre-approval with an offer.
When To Get A Pre Approval
As soon as you know you’re serious about buying a home and are ready to start the house hunt, you should get pre-approved. Pre-approvals do expire after a certain amount of time, but lenders can renew them with proper notice.
The Importance Of The Pre-Approval
Many buyers feel that they can skip the pre-approval process altogether. It has many benefits. Besides giving you a better look at your finances and how much house you can afford, pre-approvals can:
- Give you the insight to correct your credit score and help you correct credit problems
- Help to avoid disappointment when you find a home you love
- Allow first-time buyers to see all of the costs involved in buying a home
A pre-approval is a handy thing to have, and it’s not just because the experts say it’s essential. Getting pre-approved for a mortgage can help you to be more on top of your finances going into one of the most significant purchases you'll ever make in your life.
Buying a home is one of the biggest financial milestones you’ll reach in your life. If you’re a first-time homebuyer, it can be scary to take the plunge and make a down payment on your first home.
Down payments are one element that makes up the factors which determine your monthly mortgage payments, and in turn, how much you’ll be paying toward your home in total. So, it’s important to understand just how much to save for a down payment.
In this article, we’ll talk about down payments, why they matter, and your options for saving up for a down payment.
Why down payments matter
A down payment is simply the amount of money a buyer pays at the time of closing on the house. Down payments help assure lenders that you will make your monthly mortgage payments because you have invested a substantial amount of money into the house and therefore risk losing your down payment if you fail to pay the mortgage and your house is foreclosed on.
If you’re eager to buy your first home, you may want to make the smallest down payment possible so you can move in sooner. However, a smaller down payment typically means a larger monthly mortgage payment. That’s because your mortgage payment depends on several factors.
When a lender determines how much they will lend you towards your home and how much your monthly mortgage payments will be, their formula takes into account your down payment, your credit score, and the value of the property. The higher your credit score and the higher your down payment is, the less your monthly payments will be.
Mortgage types and down payments
Many first time home buyers cannot afford large down payments on their first home (20% or more). As a result, there are loan types insured by the Federal Housing Administration that are offered for as low as 3.5% of the mortgage amount.
If you aren’t approved for an FHA loan but plan on making a down payment of less than 20%, you can still buy a home with private mortgage insurance (PMI). With PMI you pay a monthly premium for your insurance in addition to your monthly mortgage payments.
How long and how much to save
So, how much should you save? The short answer is as much as possible. However, if you need to move soon because of life circumstances, it isn’t always an option to hold off on moving for long periods of time.
If you’re currently renting each month at high prices, it might make more sense to put that money towards your first home, an asset which will likely increase in value, rather than spend it on rent which you get no return on.
One of the best ways to save for a down payment is to set up a new cash savings account that will automatically deposit a portion of your paycheck each week. Having an off-limits account is a great way to save without the temptation of spending it on luxuries if the money would normally be sitting in your checking account.
Another option is to start investing. If you’re in no rush to buy a home and have the financial resources, investing pays off much more than a savings account does when it comes to increasing assets.
Regardless of how you choose to save, the most important takeaway is that you take action now to start saving and you don’t deviate from your savings plan for any reason.