Most clients who call me have an idea of where they want to live, the type of home they want to buy, and their price range. Most have been searching on any number of real estate aggregators such as Zillow, or Redfin for months and have selected favorite properties.
The Approval Letter
When they meet with me, this prior research gives me a good idea of their goals. Most of the time, however, these same clients have not looked into financing or gone through the preapproval process to obtain the invaluable approval letter. This is the most important and necessary step. The amount of the approval letter sets the budget, and from their I can quickly tell if your goals are reasonable (and if not, suggest alternatives). In this market, where supply is short, sellers field many offers and will usually accept the offer with strong financing (and the approval letter to prove it). So it is important to obtain an approval letter and understand what your ballpark monthly payment would be in a given price range BEFORE you actually look for homes. The letter would have the bank’s name and the terms of your loan. If you want, you can have your loan officer adjust the loan amount to match your initial offer on a home, in order to avoid showing your hand to the seller should your initial approval amount be greater than your offer.
The Preapproval Process
Most of the confusion lies at this step of the buying process. During the preapproval process, the bank will ask you many questions about your finances. The gist of it is whether you have a 740 plus credit score, enough assets for a down payment and closing costs, and enough income to support the proposed loan and existing liabilities like credit card and car payments. The lender is trying to make sure you fit Fannie Mae or FHA guidelines before they provide a loan, and meeting these criteria gives you’re the best interest rate and fees.
This is not the time to “shop around” for the best lender, and it is a waste of time to do that at this stage. The reason is the interest rate changes, sometimes twice daily, just like the stock market. You cannot lock an interest rate in with a bank until you are under contract. The lender who issues the approval will include the interest rate for that day, which gives you a ballpark on rates, but the time to shop is after you go under contract. Of course, you will probably ask the lender who provided the approval for the current rate at that time, since they already have all of your information. At the same time, with your approval in hand, you can then call a few more banks to “shop” for the best rate without going through the whole process again.
Pick the bank you like, and then you will go through the final (more rigorous) approval process which includes locking in the promised rate.This may or may not be the original bank you have the approval letter from. You do not need to call a bunch of banks and supply credit information before you go under contract- you just need one approval letter from one bank at that stage. Stage two- “shopping” the rate- is after you go under contract.
The Documents You Need
Here is what you need to apply:
- Bank statements from most recent two months
- Pay stubs from most recent month
- Tax returns and W2s from the last two years
- Drivers license
- Social security card
- Address and employment details for last two years
You will have to explain any large deposits on your bank statements that are not clearly deposits from your payroll. Also, new laws require your credit to be run just prior to closing so see if you have incurred more debt since your approval. If so, your closing may be delayed while the underwriting takes another look. Your approval is a snapshot of your finances from that day, do not make any changes to your credit or move money around without asking your loan officer first. Put another way, do not think you know better than your loan officer. Do you think closing accounts is a good idea, that this improves your credit and makes you feel good? Think again, lenders need a certain number of open and active trade lines. Closing an account could upset the “snapshot” approval you have.
For any lending or home buying questions, contact us.