Mortgage Loan Pre-Approval Process

The pre-approval process is a very important part of any mortgage loan. Here is a run down of the pre-approval process, the documents needed, and why…

The first step for any serious home buyer is the pre-approval process. Now you may think, I have owned three homes, I know my budget, I know what my payment will be why do I need to get pre-approved? Let me tell you why…

1. Mortgage guidelines are always changing and it is our job (not yours!) to keep up with them. Seek and experienced and knowledgeable mortgage professional for your pre-approval process.

2. Your income is not as clear cut as you may think. A person’s income and job scenarios can be complicated. People get bonus, mileage, overtime, differentials, etc… and there are very specific rules to how this income should be calculated and when certain types of income cannot be used. In the preapproval process a mortgage professional will do a thorough review of your last two years of income and properly calculate your income figures.

3. You’ll get an idea of how much money you need. Here is a big one, when you go through the pre-approval process often you will get some type of an estimate. The estimate will include the monthly payment as well as the estimated cash needed for the loan closing. During the pre-approval process (before offers and negotiations) a mortgage professional can advise you if you need to ask the seller for closing costs, if for some reason you need to put more money down (or sometimes even if you can put less money down), and ways to optimize the funds you have.

4. You can figure out what type of loan program works best for you. There are certain scenarios where borrowers will only qualify for a FHA loan. Whether it is determined in the pre-approval process their credit is too low, or their debt to income ratio is too high, the mortgage professional advises them that the FHA loan is going to be best. Here’s the thing when it comes to a standard FHA loan the property needs to be in good shape. There can often be no exposed wiring, peeling paint, obvious deficiencies, and all appliances need to be in good working order. Any properties that you decide to look at and make offers for need to be in good shape, had you not been through the pre-approval process you may have never known.

5. You never know what is on your credit report. With all of the free credit monitoring services out there people are much more enlightened on the health of their credit report however nothing is thorough as an actual tri-merge report. During the pre-approval process mortgage professionals should pull your credit report and check your scores. I  cannot tell you how many times I have had borrowers not know of items listed on their credit report. Some had car payments reporting that were either reporting falsely, or had been paid off and never updated. Often people have medical and other small collections that they are simply unaware of or have forgotten about. All of this can be discovered and addressed through the pre-approval process.

6. You want the seller’s of any potential home to know you are serious. In a scenario that a two buyers have identical offers the seller will always go with the one that is pre-approved.

What’s the Pre-Approval Process Like?

The pre-approval process is simple. In fact, if you go through the pre-approval process and submit all your documents up front the mortgage loan process becomes very easy.

Reach out to us (or a mortgage professional in your state) and let us know that you want to be pre-approved for a mortgage loan. We will collect some information from you, inquire about what type of home you are looking for physical characteristics and price. From here we will estimate the amount of taxes, HOA or CDD dues, insurance, etc… and start to develop your loan profile. We will also ask you for some supporting documents.

The following documents are typically collected in the pre-approval process:

• Photo ID

• Most recent two pay statements: These are important for a couple reasons. Calculating income is not one size fits all solution. When looking at a pay statement we can quickly determine a person’s pay structure. If you happened to be salaried your income calculations are easy. Now you if you are hourly and work 40 hours a week still relatively easy computing. The difficulty comes when you are hourly and don’t work 40 hours a week, if you get a lot of overtime/bonus/commission. In these scenarios we need to evaluate your full pay statement, often two to see what the trend is and if any of the income beyond your base can be used.

• Two Years’  Most recent W2s: Again these are important to look at income trends. When someone is lending you hundreds of thousands of dollars they want to know your income is stable. Two years of W2s helps us to figure out if you stable income. When it comes to anything beyond a salaried employee we want to know that your most recent two years of income is stable, and any additional income has a two year history and is increasing or consistent.

• Two Years of Tax Returns: Tax returns are required for self employed borrowers. These tax returns are used to compute income calculations. Certain deductions can be added back into the self employed borrowers’ bottom line. Self employed borrowers typically use a two year average unless they have a five (or more) year history with the business.

• Bank Statements: When getting a mortgage borrowers are required to bring a minimum contribution of a down payment. Depending on your loan situation (FHA/ Conventional/ VA) there will be a different requirement of a down payment. We verify that the prospective borrower has the funds. Occasionally we need to look to other options for borrowers to have the money for closing. Looking at bank statements help us evaluate if the borrower needs more money, needs to ask for closing costs, borrower or withdraw funds from their 401K or retirement funds.

Occasionally additional documentation will be asked for in the pre-approval process if the above documents are not enough for us to understand the entire picture.

Credit Report Analysis: During the pre-approval process it is important that the mortgage professional pulls a tri-merge credit report. Both the credit score and information obtained in the report are important in the pre-approval process. For each loan program there are minimum credit score guidelines. On an FHA scores can be as low as 500 with 10% down but we typically like to see scores 580 or higher. For conventional 620 is the minimum credit score. Also important is for us to look at the data contained in the credit report. Often people are not aware of everything that reports on their credit report. Sometimes medical, and other small collections can go unnoticed but drag credit scores down. In the pre-approval process we can do the following with the data from your credit report:

1. Advise if any debts should be paid down / off to increase the credit score

2. Use the credit score to check interest rates and mortgage insurance premium rates

3. Use your current liabilities balances and payment amounts to determine if with these debts and the proposed housing payment you can qualify for the loan

4. Run Automated Underwriter findings with Loan Prospector or Desktop Underwriter to see if we are likely to get an approval on the loan

What is Automated Underwriter Findings and why does this matter in the Pre-Approval Process?

The Automated Underwriter System is a system that takes your credit profile and the proposed loan scenario and determines if the loan meets mortgage guidelines and if it “likes” the scenario. Mortgage guidelines are set of rules that each loan must follow. Example: a debt to income ratio 50% or less on conventional mortgages. The Automated Underwriter System takes it a step further analyzes your credit profile with the proposed payment and determines if you should be approved for the loan. This is important because your loan may meet all the textbook guidelines but if the Automated Underwriter System may not like your loan profile and may advise a “Refer” or a “Caution.” If this happens your loan would need to be manually underwritten to be approved. This means a much more in depth look into your credit profile, your history of renting, etc…On the other hand if you get an “Approve” or “Accept” you can expect your loan has a high probability of being approved.

Why is this important to my pre-approval? Well for some lower credit borrowers the Automated Underwriter System may not like their loan even if it falls within the mortgage guidelines. We have had some borrowers that cannot get an “Approve” with a 40% debt-to-income ratio when the mortgage guidelines allow up to a 50% debt-to-income ratio. The Automated Underwriter System is really important during the pre-approval process because an “accept” or an “approve/eligible” means that we can tell what exactly will be needed to get the loan approved.

Once all of the above items have been addressed you will know if you have been Pre-Approved! The pre-approval process would have set you up for success and you would know if you are likely to get approved for the proposed loan, a rough idea of what your payment will be, and all of your documents will have already been reviewed by your mortgage professional. It is important to keep in constant communication with your mortgage professional once you have completed the pre-approval process so that they can update your estimates with figures specific to the properties you are looking at and if needed provide you with pre-approval letters. Once you get into a contract on a property you can expect the sellers will have stipulated that you start your mortgage loan within 3-7 days and having already established a relationship with a mortgage professional during the pre-approval process will help to expedite the application and loan process.

Reach out to us at Carbon Capital to get your Pre-Approval Process started. We are eager to get you Pre-Approved and out looking for your new home! You can visit us at www.FloridaMB.com or call us at 904-513-8000 with any questions!