For an estimate of how much someone can afford to spend on a home, a mortgage pre-qualification can of course be useful. However, a pre-approval has much more value. Why?
What is a Pre-Approval?
To be pre-approved. means the lender has checked:
• the potential buyer’s credit
• Proof of income
• Proof of assets
The Potential Buyer’s Credit
To approve a conventional loan, most lenders require a FICO score of 620 or higher.
Even for a Federal Housing Administration loan, some lenders require a FICO score of 620 or higher.
When it comes to the lowest interest rates, lenders typically reserve these for customers with a credit score of 760 or higher.
Approved borrowers with a score of 580 or higher can pay as little as 3.5% down, according to FHA guidelines.
Those with lower scores must make a larger down payment, but usually lenders will work with these types of borrowers and suggest ways to improve their score.
Proof of Income
Part of the pre-approval process will require potential home buyers to provide:
• W-2 statements from the last 2 years
• Recent pay stubs showing a buyer’s year-to-date income
• Proof of any additional income (such as bonuses, alimony, etc.)
• The buyer’s two most recent tax returns
• Should the borrower be self-employed, he or she will need to provide additional paperwork concerning the business and income to prove financial stability is current and will continue in the future
Proof of Assets
Bank statements and investment account statements need to be provided by the potential borrower to prove there are funds for the down payment and closing costs, in addition to cash reserves.
• The down payment, though it is a percentage of the selling price, will vary by loan type.
• The basic types of mortgage loans, potential home sellers and buyers should be aware of, are as follows:
o Conventional/Fixed Rate Mortgage
o Interest-Only Mortgage
o Adjustable Rate Mortgage (ARM)
• These loans cater to certain groups that qualify for special assistance:
o FHA Loans
o VA Loans
• Exotic types of loan are as follows:
If you are considering selling your house or buying a new house this upcoming New Year of 2020, you now know that you will need to be pre-approved for a mortgage. Keep in mind, the final loan approval will occur once you, as a buyer, have had an appraisal done on the property that the loan will be applied to.