Once you make the decision of what kind of loan you want to apply for, you will need to find a lender that handles that type of loan. You have two options at this point: you can either pre-qualify or get pre-approved.
To pre-qualify is quicker and easier but it is less of a guarantee. You provide very basic information such as income and the lender tells you how much of a loan you could get. They will give you a pre-qualification letter that you can take to a real estate agent. However, this is no guarantee that you will get a loan or the amount that is listed on the letter. Most agents do not pay too much attention to pre-qualification except to show you homes at or under that amount.
Pre-approval is a much better choice. With this process, you fill out all of the loan paperwork as if you have a house in mind and the lender follows the procedures to get you approved for a specific amount. The pre-approval is good for a limited time, usually thirty days, before you will have to go through the process again.
The benefit to getting pre-approved is that it allows you to close on a house quickly when you find one you like. If there are several bidders on one property, being pre-approved can make the difference for the seller on who to choose.
The loan process is lengthy and involves a lot of time and paperwork. That is why it is best to get this part taken care of before you begin your house search.
One of the first things a lender will do is check your credit. They don’t want to waste time on the rest of the process if you will not qualify based on your credit score. While your score may not automatically disqualify you, it can hurt your chances to secure a prime rate. You will have the opportunity to sit down with the lender and explain your side of the situation if you have a lower score. It is best to mention this prior to the check.
You will need to provide your W2 from the previous two years along with your federal tax returns for those years. You will have to show your most recent paycheck stub, which will show your year-to-date earnings. Some lenders want a month’s worth of stubs to show your monthly income.
You will also have to provide proof of any secondary income you want considered for the loan. Proof of credit and bills owed will also be requested to show how much you currently owe. This will include auto or personal loans and student loans. If you have any investments, you will need to show paperwork on those, too.
Lenders may also request to see copies of rent or mortgage payments to establish a reliable payment history on housing. They may ask for paperwork on the house you are interested in buying if you have one picked out. This will help them know how much you will want to borrow if you are approved.
Not every lender will require the exact paperwork, but it will save time in the loan process if you have it ready to present.
The lender will most likely require an appraisal to ascertain the home’s value. This will allow them to know how much they can extend to you in a loan and what you will have to pay in a down payment. It will also let you know if the asking price exceeds the value of the home. Most lenders today will not write a loan for more than the value of a home, and many will only provide a loan up to eighty percent of the home’s worth.
Good Faith Estimate
Your lender is required by law to provide a good faith estimate to you within three days of you applying for a loan. This estimate will tell you what you should expect to pay at closing. These fees are partially for the loan application and partially for the costs associated with buying the home. Some of the fees you may expect to see include the following:
- Credit report fee
- Property appraisal
- Lender’s inspection
- Mortgage insurance application
- Loan application fee
- Loan processing fee
- Underwriting fee
- Abstract or title search
- Preparation of documents
- Title insurance
- Mortgage insurance
These costs typically range between three and five percent of the cost of the house and may be required to be paid in cash rather than added into the loan. Sometimes the seller will pay part of the fees, but you will need to ask ahead of time.