Buying a Home: Get Preapproved for a Loan

You know how much you can afford, but what does the bank think? It may be willing to lend you an amount that could get you into trouble financially, as we explained in chapter 4. Or it may not be willing to lend you as much as you would like. No matter what, you need to know what the bank will let you borrow before you start shopping for a house. Real estate agents don’t want to waste their time showing houses to buyers who might not be able to come through with the financing.

Besides, you don’t want to think you can afford a $350,000 house, start looking, and then find out that you can only get a loan for $250,000. The features that come with the $350,000 house won’t exist in the $250,000 house and you’ll be setting yourself up for disappointment.

What’s more, a savvy seller won’t accept an offer from a buyer who hasn’t secured financing. Why should they waste valuable days taking their home off the market while waiting to see if you can get a loan?

Getting preapproved is easy. You can do it online by visiting a loan lead generation website, a mortgage broker’s website or a lender’s website and providing some personal and financial information. You can also call lenders or mortgage brokers and do things over the phone. Once you answer the interview questions, whether online or by phone, you’ll need to follow up by submitting supporting documents. You’ll then wait for a decision from an underwriter. Here’s the information you’ll need. (To learn more, read Prequalified vs. Preapproved – What’s the Difference?)

Getting Preapproved for a Mortgage

To be preapproved for a mortgage, you will need to provide information for everyone who will be a borrower on the loan (for example, both you and your spouse):

Zip Code

This tells the bank where you plan to purchase (this isn’t crucial, so don’t worry if you’re considering multiple zip codes – just pick one).

Down Payment

This is the amount you’re putting down (as a percentage of the purchase price). The minimum lenders require will depend on current market conditions and the type of loan. Federal Housing Administration (FHA) loans require 3.5% down and Veterans Affairs (VA) loans require nothing down; conventional loans require at least 3% down.

Social Security Number

Your SSN will be used to run a credit check during the application process – this can be done instantly. The credit check will show your monthly debt payments, which will affect how much additional debt the bank will let you take on for your mortgage, and your credit score, which will determine what interest rate you’re eligible for (or if you’re eligible to borrow at all). The lender is required to tell you your credit score, so there’s no need to pay for your own credit report to get this information. If there is more than one borrower, the lowest credit score is the only one the bank will count. (For more about your credit, see How to Read a Consumer Credit Report.)

Employment Information

You will need to tell potential lenders where you work, including contact information for your current employer. The lender needs detailed employment information to verify your income and determine whether you can consistently make your monthly mortgage payments. You should also know the number of years you’ve worked for your current employer, your job title or line of work and the number of years in your current line of work (if your job title or line of work isn’t clear cut, pick the one that will give you the longest track record in that field because lenders look favorably on a longer amount of time in the same line of work).

Income

Know your base annual or monthly income before taxes if you work for someone else, after taxes if you’re self-employed (no, it’s not fair), anticipated for the current year and actual for the previous year. Also calculate your annual or monthly overtime hours (if you are paid for overtime). This income has to be consistent for two years to count. If you made $3,000 in overtime this year and $1,500 in overtime last year, the lender will consider you to make only $1,500 in overtime, reliably, each year when considering how much home you can afford. The same reliability test applies for your annual bonus (so if you got a $2,000 bonus this year and a $0 bonus last year, as far as the bank is concerned, you don’t get a bonus). The same goes for any other sources of income, such as interest and dividends that you withdraw instead of reinvesting.

Insurance

You should research and bring estimates for homeowners’ insurance and tax rates to your lender when you are looking to get preapproved. The lender can estimate these for you, but the lender’s estimates may be inaccurate. If you’ve done your research, you can supply the lender with your own numbers that you know to be reasonably accurate. (For information on shopping for homeowners insurance, see our Homeowners Insurance Guide.)

Net Worth

Add up how much money you have in all your accounts: retirement, savings, checking, brokerage, etc. You do not need to supply account numbers at this point.

Prequalification

After you reach the end of the online form or the conversation, an algorithm will spit out a purchase price it thinks you can afford. This is commonly referred to as prequalification. The terms prequalification and preapproval get swapped all the time, but for the purposes of this article, we’ll use prequalified to mean that you’ve just completed the quickie application process over the phone, and preapproval to mean that an underwriter has reviewed supporting documentation of your financial situation (such as previous years’ tax returns and two months of bank statements) and generated a customized maximum amount the bank will lend you. You want to obtain preapproval, not prequalification, before you start shopping for a house.

At the prequalification stage, lenders will give you a preliminary good faith estimate that will list the loan amount you might qualify for, interest rate you might qualify for and what your closing costs might be. These numbers are all estimates. What you’re really trying to do here is judge loan officers or mortgage brokers moreso than the offers themselves. The most important thing in choosing a lender is not choosing the one that gives you the cheapest good faith estimate, but choosing the one that seems the most trustworthy, knowledgeable and reliable and tries to give you the most realistic good faith estimate possible at this point. If you have a friend or relative who can recommend a mortgage lender or broker, that’s a great place to start.

Mismatching Estimates

The bank may say you qualify for more or less than you think you should. If the bank says you qualify for less than you think you should (or less than you know you need to buy the type and location of home you want), don’t take this as a final answer. To improve your attractiveness to lenders, there are things you can accomplish in just a few months: improving your credit score, decreasing your debt, increasing your savings and getting a higher-paying job in the same line of work. (To learn more, read 5 Steps to Scoring a  Mortgage.)

If the bank says you qualify for more than you think you should, ask how the estimate was calculated. That’s a perfectly reasonable question that any competent loan officer should be able to answer easily. You shouldn’t take the lender up on an high offer that doesn’t match your calculations (assuming you’ve double checked your calculations), but the good news in this scenario is that you shouldn’t have any trouble getting preapproved for a loan you can truly afford.

Once you’ve prequalified with a few lenders and decided which you might prefer to work with, you’ll want to pass the underwriting test so you have a genuine preapproval that will allow you to make an offer on a home. All lenders will want similar paperwork from you for this process, so get it together before you apply – it may take longer to gather than you think. Here’s a list of commonly requested paperwork:

• last two months of statements for all asset accounts (savings, retirement, brokerage and checking)
• last two years’ W-2 forms
• last two years’ tax returns
• most recent month’s pay stubs (your last two pay stubs if you are paid every two weeks and your last pay stub if you get paid monthly)
• if you’re self-employed, a year-to-date profit-and-loss statement
• 1099s for the last two years
• copy of driver’s license
• copy of Social Security card

Expect to wait at least a week to get your real preapproval. It may take longer depending on the underwriter’s work ethic and work load and whether they need additional documentation from you. The entire loan preapproval process, from gathering your information and paperwork to contacting several lenders and passing underwriting will probably take you at least two weeks unless you have nothing else to do. When you’re trying to juggle applying for a loan with work and your other day-to-day responsibilities, it’s easy to spend even a month or more in this stage because you can’t find time to work on your loan every day.

Once you have a written preapproval letter in hand, you’re almost ready for the fun part – home shopping. But first, you must find an agent.