Long gone are the days when securing a mortgage required a simple credit check. Since the housing market meltdown of 2008, the path to a mortgage has been lined with paperwork and red tape.
“Regulations have made the pendulum swing so far in the opposite direction that there’s an overemphasis on documentation and verification,” says Alex Margulis, a private mortgage advisor at PERL Mortgage, Inc., in Chicago.
And while mortgage lenders may be more adept at guiding homebuyers through what Margulis calls “the new normal,” it pays to understand the process—as well the paperwork you’ll need to gather—before you begin shopping for a house.
What documents do I need to provide for pre-qualification?
After you’ve budgeted for a home and tidied up your finances, it’s time to get pre-qualified by a reputable mortgage lender. For this simple (and usually free) process, you’ll need to provide a comprehensive snapshot of your finances, including:
- Your debt
- Your income and assets
- Personal information, such as your date of birth and Social Security number
It’s a common misconception, but pre-qualification and pre-approval are two very different things. Many buyers believe that pre-qualification means they’re guaranteed a loan, says David Kutner, an independent senior loan advisor in Glendale, Calif. However, the real purpose of pre-qualification is to give you an idea of the amount of mortgage for which you might qualify. It certainly doesn’t carry the same weight as the comprehensive pre-approval process nor does it mean that your future as a homeowner is a sure thing.
What documents will a lender need to pre-approve me for a loan?
Once you’ve been pre-qualified— a status that can help build your desirability for the seller—your next step is pre-approval. You may not have found a house to bid on yet, but without pre-approval your offer may not be accepted by the seller once you do find one. To get pre-approved, you’ll complete a mortgage application, and your file will undergo a more extensive review by an underwriter. It’s here that all of your paperwork comes in.
According to the Consumer Financial Protection Bureau, mortgage brokers should give you a list of what you’ll need for your mortgage application. It may include any of the following:
- Social Security numbers or individual taxpayer identification numbers for all borrowers
- Home addresses for at least the past two years
- Current names, account numbers, and balances of checking, savings, money market, retirement, and credit card accounts
- The address of your bank branch
- Checking and savings account statements for the past three months
- Your most recent pay stubs, W-2s, or other proof of employment and income verification
- Federal income tax returns for the past two years
- Evidence of any other income you receive (such as child support orders or Social Security award letters) if you wish to include this income for qualification
- Balance sheets and tax returns if you are self-employed
- Divorce settlement papers (if applicable)
- Canceled checks for rent or utility bill payments to show payment history
- Information on other consumer debts, such as credit cards, car loans, furniture loans, student loans, and department store credit cards
- Gift letters, if you are using gifts from parents, relatives, or organizations to help cover the down payment or closing costs. Gift letters state that the money you received is a gift and will not have to be repaid.
After pre-approval, the lender can be specific about the mortgage amount for which you’ll be approved and also give you a more accurate interest rate. But while you’re definitely one step closer to obtaining a mortgage and becoming a more desirable candidate, the rates you’ve been quoted cannot be locked until you’re under contract with a seller, meaning you’ve found a home, put in an offer, negotiated, and have come to an agreement.
“Remember, all of these are ‘pre-,’ and that means pending a purchase contract and pending an appraisal that comes in with the value of your purchase contract,” Kutner says.
What will I need to make an offer on a house?
So what happens once you are pre-qualified and pre-approved and then have found a house on which to bid? Working with your real estate agent, use that pre-approval letter to beef up your offer. “If the seller confirms that there’s a contract, that’s when the buyer can start shopping for the lender in earnest,” Margulis says.
You’re under no obligation to work with the lender who pre-approved or pre-qualified you. You have the option to shop around for the best offer and compare factors such as rates, loan terms, lender-related fees, and third-party charges. The U.S. Department of Housing and Urban Development offers this mortgage shopping guide, plus a worksheet, to assist in the process.
While shopping for a mortgage, you may see unusually low rates advertised online or on TV. Take heed: Rates can change on a daily basis, and they can be locked for different time increments, typically 15, 30, 45, or 60 days. If an interest rate is significantly lower than others, be sure to ask what the lock period is, as well as the terms of the loan. Deceptive brokers may advertise a lower rate without mentioning it’s a 10-year loan.
With all of the homework you’ve already done preparing your finances and application materials, don’t drop the ball when selecting a mortgage lender. Rates aside, it’s important to work with someone who is licensed or registered and that you can trust. “I always recommend buyers meet their loan officer in person,” says Bryan Kelley, a senior mortgage consultant with WinTrust Mortgage in Chicago. “They need a qualified person who has their best interest in mind.”
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