Our home is the single most expensive thing that most of us will own during our lifetime; and getting approved for a mortgage loan can be stressful, complicated and time consuming. And unfortunately, obtaining a loan is even more difficult today than it has been in the past, due to declining house prices in many parts of the country and the reluctance of some lenders to lend money to buyers.
There is a difference between being pre-approved for a mortgage and pre-qualifying for a mortgage. Being pre-qualified simply means that you have a statement from your lender verifying that, based on a preliminary credit check, you should be able to qualify for a mortgage loan. Being pre-approved means that your information has actually been verified and that you have an underwritten approval for the loan that you are requesting. This is an important difference, as some sellers won’t accept an offer from a buyer who has not been pre-approved; some realtors will not work with a buyer who has not been pre-approved.
Being pre-approved for a mortgage loan also gives most borrowers a fairly accurate idea of now much they can afford to borrow – and how much house they can afford. A pre-approved mortgage should also have a guaranteed interest rate. Despite the obvious advantages of being pre-approved, in some areas of the country, only around 10% of potential buyers are pre-approved and many buyers start the pre-approval process while looking for a home. This strategy can delay you; even prevent you from buying the home of your dreams.
Be prepared to get lots of paperwork together in order to apply for and be approved for a mortgage loan. Typically, your lender will expect to see your last few pay stubs, or a profit and loss statement if you are self-employed; as well as your tax returns from the last two years. You may also need bank statements and your lender will pull a copy of your credit report. It may take up to a few weeks to be approved – or otherwise – for a mortgage loan.
You don’t necessarily need to have excellent credit to be approved for a mortgage, but a good credit score means that lenders will probably offer you better terms and lower rates. Your credit score can make a huge financial difference - a poor credit score that is below 630 can mean that your monthly mortgage payments will be anywhere between $50 and $250 higher. If practical, consider trying to improve your credit score and even waiting a year or two before you buy.
In addition to a good credit score, lenders typically look for a stable work history – ideally at least 6 months continuous employment with the same employer. A lender will also look at your income to debt ratio, to make sure you can actually afford to pay the monthly amount. Of course, at this point you should have a fairly good idea of what you can afford anyway. Any large outstanding debt that can be paid off will give you a better income to debt ratio; and if possible, try not to make a big purchase such as a new car just before applying for a loan, as it will lower your credit score
Finding the right lender is an important part of the approval process. It’s a good idea to compare not only the fees that you will incur with your application, but the overall service provided as well. Try to find out whether the lender is experienced and efficient, how long they have been in business and whether they are conveniently located – you will probably be visiting their office several times during the approval process. One of the most effective ways to find the right lender is simply to ask friends, family and co-workers for their recommendations.
Deciding between a smaller local lender and a larger national mortgage lender can be a difficult decision for many borrowers. In today’s competitive housing market, a smaller lender may be anxious to have your valuable business, may offer more personal service and may be more familiar with the local market. However, a local lender may not be available all the time. A larger national lender may be in a better financial position to lend you money; they may also offer a wider range of products and are often available around the clock.
Once you have been approved for a mortgage loan, the real hard work begins – trying to find the right house!
By Rachel Jackson.
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