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Mortgage Pre-Approval & Process

A mortgage loan pre-approval is a crucial part of shopping for a home and it's wise to speak with a mortgage professional prior to simply shopping for your dream home.

Mortgage Pre-Approval

Buying a home can be both exhilarating and stressful; however, if the correct steps are taken, you can experience a very smooth transition from renter to home owner.

A mortgage pre-approval will allow you to shop with the confidence that you'll have financing when it's time to submit an offer.

There are many benefits to obtaining pre-approval, some of which include:

  1. You'll be clear about how much you can afford and shop within your price range.
  2. Your offers will be taken seriously by sellers.
  3. You'll have an advantage over buyers who are not pre-approved.
  4. You'll determine whether you should consider conforming or jumbo financing.

Pre-Approval Process

The process is fairly simple, as all of the documentation you'll need will most likely be saved electronically or accessible online. For the sake of being thorough it's best you provide your mortgage professional with as much documentation as possible. Some of the documents include:

  • Two most recent paystubs.
  • Two most recent federal tax returns.
  • If self-employed, two most recent business returns.
  • All asset statements—two most recent months for all checking, savings, 401k, IRA, stocks, bonds etc. You'll need to provide all numbered pages—even if they are blank.
  • Authorization to pull credit—This can be an email authorizing the credit inquiry or you can pull your own credit.
  • Contact information for your human resources representative.

If you would like to help move your approval process along, check out our comprehensive list of documents you'll need when applying for a mortgage.

Have more questions? Check out our list of important questions to ask your lender.

What financial information do I need to provide?

Mortgage loan applications are extremely detailed. In addition to asking you specific questions, a lender will ask you to produce records detailing your fiscal activities. These records should include items such as monthly earnings, monthly expenditures, debts, and investments. You will need to show past W2 forms and your current pay stubs for the year.

Also, you will have to disclose your current debt. You will need to include all outstanding debt as well as provide the lender with your account numbers and the addresses of the creditors. In addition to all this, you will need the purchase contract for your new home. If you have too much debt, you might be turned down for a loan.

There are many factors involved in a mortgage. Usually you will be notified of your status within 30 days of completing your loan application. If the situation is exceptionally difficult, it might take a while longer to get a decision. Check with your lender to see how long your application is expected to take. You don't want to jump the gun and start viewing homes only to find out you didn't get the loan.

Check your credit report before you talk to a lender. If there are any discrepancies it's best to catch (and fix) them before going to a lender. Your credit report will have a strong bearing on your application acceptance process. If your files show that you have poor credit, the rest of your financial standings might not matter. You are allowed by law to know what's in your credit report. If you are unsure about anything in your credit report ask someone from the credit bureau to explain it to you.

How Will My Monthly Payments be Calculated?

By looking at your personal economic condition and getting an estimated property value, a lender determines how much you can actually borrow. The lender will review your financial standing while a Chicago home appraiser determines the property's value. The estimated property value can heavily influence the amount you are allowed to borrow.

It is common to receive between 80%-90% of the estimated property value. The remaining amount is covered by the buyer's down payment. This is why most down payments fall around the 20% range. Sometimes the appraisal ends up being lower than the home's current price in which case the loan and the down payment won't be large enough to buy the home. When this happens, a lender may call for the buyer to provide a greater amount in the form of a down payment. This is to reduce the discrepancy between the appraised value and the asking price on the property.

Be in the Know

There's going to be a lot of terms and numbers being thrown at you during the home buying process. You're not going to know what all of them mean, so make sure you ask about anything that's unclear. In the loan process, a lender might give you figures like "28 and 36". What do these numbers mean?

"28 and 36" are ratios that are close to the ones a lender will quote you. They well help you predict your mortgage payment and existing debt.

"28" represents the amount you can spend on a home. Before taxes, you can spend 28% of your total income on real estate tax, the mortgage, and insurance.

"36" represents the amount you can spend on all your debts. This figure includes your mortgage as well as any other debts you have incurred. With all of your payments added up, the total should not be more than 36% of your total income.

Lender ratios will vary. "28 and 36" are common, but not necessarily used by everyone. Ask your lender what their ratios are. You can save some time if you know ahead of time that you will not meet a certain lender's requirements.

If your application is denied, under federal law the lender is required to cite, in writing the precise reasons your loan was turned down. This information can be vital when applying for another loan. Make sure you understand all the reasons that your application was denied. See if there is anything you can do to meet the lender's criteria. If not, at least you are aware of the problems and can address them before you meet with another lender.

Some Factors Crucial To Your Loan's Approval

  • Credit History - Did payment issues arise due to poor credit history or large amounts of debt? See how you compare to the lender's criteria. Were there any unique circumstances regarding you past credit troubles? Ask for a chance to explain.
  • Appraisal - Make sure you get an accurate appraisal. If the home is undervalued, you might have tried to secure a loan that is larger than you need. If this is the case, it would be a good idea to ask the lender to re-inspect the appraisal. Check the prices that similar homes in the area sold for. If you paid for the appraisal, you are entitled to receive a copy of it.
  • Down Payment - Do you have enough for the required down payment? If you don't have enough, check with your lender to see what other types of mortgages they offer. They might have an option that allows you to lower the amount of the down payment.

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