Purchasing a home can be one of the most exciting times in life. Unfortunately, however, it can also be one of the most stressful. Excitement builds when you start considering the prospect of home buying, imagining the property of your dreams. But frustration can mount if visions fail to match reality. This is one of the reasons we recommend pre-qualification as the first step in the home-buying process and pre-approval if you are serious about buying a home.
Pre-qualification and pre-approval are similar but different
A pre-qualification is a quick and cursory review of your financials based on what you input on a website or what you have told a mortgage loan officer. One way to think about it is the initial conversation with the lender.
Pre-qualification is a good idea if you have just started considering buying a home but are not ready to pull the trigger just yet. You are more likely to get accurate results when speaking with an experienced loan officer who knows how to analyze income, credit and asset information. They may advise you to step back a bit and take corrective measures prior to applying for a loan. These might include paying down some debt, waiting until after taxes are filed, improving credit scores or increasing savings and reserves. Better to determine such things prior to making an offer on a property. Most importantly, getting pre-qualified will save you time and disappointment before you start the search, since the information you provide will help determine how much home you can afford.
In a pre-qualification, lenders will ask how much you owe and how much you pay per month in debts. They will use this information to determine debt ratios and make sure you have enough funds to close the transaction. Oftentimes, they will write a pre-qualification letter that you might be able to use when making offers. However, the letter is akin to Swiss cheese, as it leaves the lender with lots of outs as financials have not yet been verified. “Qualified” refers to the fact that the loan amount is conditional upon verification of initially disclosed information.
Since pre-qualification provides a rough overview, it does not guarantee loan commitment. For this reason, serious buyers often opt to seek pre-approval instead of pre-qualification.
When you start this process, be prepared to provide your:
- W-2s and 1040s for the past two years
- Year-to-date pay stubs
- Profit & Loss (P&L) statements for business owners
- Bank and investment statements
Once you submit a loan application and give permission, lenders will pull a credit report that will be a large part of their decision-making process. After all, how you have paid your obligations in the past is the best indicator of how you will pay them going forward. Then, they will determine how much you qualify for based on credit, debt ratios and assets available to pay down payment, closing costs while maintaining reserves. FICO scores will also help determine eligibility for certain loan programs.
Keep in mind that lenders are looking at current salary or hourly pay as well as consistency of income. Don’t be surprised if up-trending commissions, bonuses and other variable types of income are averaged over two years. Conversely, down-trending variable income will trigger questions about the viability of such income going forward.
Preapproval will give you an edge when making an offer, since associated purchases are not contingent on loan approval. This is important in a seller’s market, which is where the Redlands’ market is currently positioned. Assuming all goes well, the lender will issue a Pre-Approval Commitment Letter, which the buyer can include in any written offers. Since we work closely with lenders and brokers, your first call should be to the office of Candace Cantu McGloin who is excellent at matching lenders and buyers.
After pre-approval, the final stage of the mortgage process is the commitment of an ironclad loan. A lender will re-underwrite your loan after receiving information about the house you want to purchase and the amount of financing required. Price is just one aspect that lenders consider.
Other steps in the mortgage approval process:
- Appraisal of the property (The property’s appraised value must come in at the same or higher than the agreed upon sales price.)
- Title search
- Updated credit report and financial documents
- Proof of homeowners’ insurance. In some areas, flood insurance may also be required.
As soon as you have successfully navigated your way through the phases of the mortgage process and all the criteria has been met, you will be well on your way to a closing date and signing paperwork to purchase your home.
When it comes time to buy or sell a house or condo in Redlands, call Keller Williams Realtor Candace Cantu McGloin. She is qualified and willing to help home buyers and sellers across Southern California. Specializing in the cities of Redlands, Highland, Yucaipa, Grand Terrace, and Loma Linda Candace has done transactions both on the buying and selling side throughout Southern California. To learn more about real estate in Redlands or the Inland Empire or to list your home, call Candace directly at (951) 201-2443.