So you want to jump into the process of getting approved to buy a home? Congratulations! If this is your first time trying to buy a home, just know there are some steps you need to take before you can look at properties, seriously. We are going to go through the basics of what to expect and what to do, here.

Even if you have gone through the pre-approval process before and this is not your first time, we are going to cover some pretty detailed information that likely will benefit you in your efforts to make this home purchase easier, and less confusing, than your last experience.

So, let’s start with, “what is pre-approval”? When you are wanting to begin your process to look at buying homes, one of the first steps in the process will be needing to get approved or qualified with a mortgage lending institution (unless you can buy in cash, which, more power to you). This institution can be a bank, a credit union, a mortgage broker, or a direct mortgage lender. The institution you work with will need to get information from you so they can review your history and determine if the aspects of your finances will meet the boxes outlined by the government programs that are available.

First, let’s start with what information they will need from you so you can prepare those items in advance. The lending institution you work with will request two broad categories of needs. They are:

1. An Application – In order to apply for a mortgage, you have to complete an application with the lender so they can begin the documentation process and paint the picture of whether or not your history and finances fall within the government guidelines. You can complete the application in person, over the phone, or via an online application system (the preferred option, traditionally). This step you need to get directly from the lender you are working with. This application will ask you about:
   • Your private information like your birthday, social, phone number, email, citizenship, etc.
   • The last few years of where you have lived (plus, if you have rented, owned, and how much you paid in rent).
   • The last few years where you have worked (plus, what your job titles were, how much you were paid, if you were self-employed, and if you work for family).
   • What bank accounts and investment accounts you have (and their approximate balances).
   • If you have owned a home in the last 3 years or if you own any other property anywhere, currently.
   • If you are currently in any lawsuits, have any judgments, have had a recent bankruptcy, foreclosure, or short sale, or any other derogatory history events.
   • What your preferred language of communication is and if you have a preferred nickname you wish to go by.
   • What purchase price ranges you wish to look at and how much you wish to put down for down payment.
   • And they will ask you for your permission to pull your credit, and more.
2. Documentation – On top of you completing the application, the lender will eventually have to gather your supporting documentation in order to prove the information you put into the application. Whether the lender asks for these up-front or not, you will eventually have to supply:
   • Income documentation – If you are:
     • Self-employed – this will likely be the last two years of your personal tax returns, the last two years of your business tax returns (if you are part of a partnership, s-corp, c-corp, etc.) and W2s for the last two years, if you pay yourself a salary wage as an officer of the business. Depending on the time of year, you could also be asked for a signed profit and loss statement for the current year. And, if you owed income taxes from your tax returns, you will be asked for proof that the income taxes have been paid or an IRS payment plan has been put in place.
     • Not self-employed – You will likely need to provide the last 30 days of pay stubs and the last two years of your W2s.
     • Retired – then you will need to provide income documentation for any social security, pension, annuity, or other retirement income. Usually this will entail getting the “award letters” for this income, which traditionally are provided to you from your retirement income organization at the beginning of the year and show your gross monthly benefit and the terms of you receiving the income.
     • Quick note, if multiple people are on the application together, you will need to gather individual documents for everyone. If you have second job, child support or alimony income, disability, or other income types, you will need to gather documentation for those also.
   • Asset Documentation – This can include:
     • Bank statements for the last two months. If you are self-employed, this will likely also require the business bank statements for the last two months.
     • Investment or retirement account statements for the most recent month or quarter.
   • Personal Statements – such as:
     • Your Driver’s license.
     • Or if you are not an American citizen, your “Green Card”, or other visa documentation.
   • Real Estate Documentation – If you own any other real estate, those expenses have to be documented if you will still own that real estate after the purchase of this new property. Requested documents could be:
     • Your most recent mortgage statements if you have mortgages or home equity loan liens on the properties.
     • Homeowner’s insurance statements
     • Property tax statements
     • Homeowner’s Association Documents- or proof you are not in a homeowner’s association area.
   • Others – if you have any unique situations, more documentation could be required to explain the scenarios.

Second, let’s go through what the pre-approval and a pre-qualification are. As a potential home buyer, you 100% want to make sure you are getting a full pre-approval to purchase a home. A “light” pre-approval or a pre-qualification is not in your best interest and can cause you major issues down the road if you make offers on a home. But, what do these terms mean?

1. Pre-Qualification – this is where a lender (through their loan officer) collects basic information from you in order to provide you an estimate of how much you can afford to borrow. Much of the documentation shown above will not be collected and much of your pre-qual will be solely based self-reported information from you. In essence, it is not a thorough review of all your information, but more of a “looks good” report. There is nothing wrong with getting a pre-qualification if you are really just trying to figure out estimates of ranges you may be able to look at and what payments may look like, because you are not looking to buy anything right away. If you do wish to make offers quickly, you want to go through a full pre-approval. The sad thing is you can make offers with a pre-qualification letter (except in certain states that are more strict). But you are only opening up the opportunity that you could get under contract on a home but not actually qualify once your documentation is received and you are found not to be fully approved. If you are not asked for and sending in all the documentation needed, it may be a sign you need to check with a different loan officer that will do more work for you up front.
2. Pre-approval (soft) – is supposed to be a thorough review of all of your information and documentation to make sure everything is likely to work for you to close on a home. But, many lenders take the easy approach and only collect some of the information that is traditionally needed (hence, the “soft” notation after pre-approval above). This is still better than a pre-qualification, but does still leave you fairly vulnerable to the likelihood that your purchase could fall apart due to un-reviewed and unforeseen information. Same as with pre-qualification, make sure someone is gathering everything from you before you make an offer on a home (or find a loan officer that will do the extra work up front).
3. Full Pre-Approval and TBD Approval – Full pre-approval, as you can guess, means you have provided all the documentation and the loan officer has reviewed everything with you to make sure all information is understood. If everything has been reviewed, you are very likely not to have issues during your underwriting period and likely can close on your home purchase with ease. If needed, the loan officer can take it a step further and get a TBD Approval (To Be Determined Address Approval). This means that your application and all your documentation was sent into underwriting and blessed by an underwriter, on top of being reviewed by the loan officer. Clearly, this provides you even more certainty that everything will be good to go. Traditionally, this will only be done if there are a few things within your file that are a little riskier and would be best to have double checked before giving you the full “thumbs-up”. Please, always focus on getting a full pre-approval when looking at homes.
4. Quick side note for you – just because you have a pre-qualification or a pre-approval, does not mean you will 100% be able to close on a home purchase. You need to understand that your finances, assets, credit, and numerous other aspects can change after pre-approval and during your home buying process. If anything comes up differently than what you showed in your pre-approval information, that could change whether you are approved or not. Make sure if any changes come about (job changes, you have your credit pulled again, you will have more or less assets by a decent amount, etc.) that you inform your loan officer of the changes so they can make sure everything still looks good. AND THE BETTER SCENARIO IS TO LET THE LOAN OFFICER KNOW THAT SOMETHING COULD CHANGE WELL BEFORE IT WOULD, so everyone can plan for a fix.

For a short synopsis on pre-qualification vs pre-approval, check out below:

1. Pre-qualification – best for getting a feel of if you could get approved down the road. Helpful to understand programs, payments, interest rates, and things you can work on and improve before pre-approval.
2. Pre-approval – best if you want to actually look at homes and make any offers. You can still get all the information on programs, interest rates, payments, and other information at the same time. But do not begin seriously looking at home unless you and the loan officer have gone through your credit, bank statements, income documents, and other pieces in detail, to make sure you are good (and the loan officer has verified you are pre-approved).

Third, let’s go over what else to ask the lender/loan officer to make sure you have a clear understanding of these before and after you are pre-approved.

Just because you now understand what you are likely approved for, purchase price wise, and the loan officer and you have gone through your information, does not mean you should move forward in making offers.

There are a lot of important details that you need to make sure you understand and are prepared for with your home purchase. Before you officially make offers, make sure you 100% understand these aspects so you are prepared ahead of time.

They are:

1. How can you improve your interest rates and how interest rates work – Your interest rate is not a set rate. In fact, when you are under contract on a home, you can literally choose between ten or more different interest rates, pretty easily. Each rate will vary depending on the market, the costs you are willing to bring to closing to “buy down” your rate, the program you choose to go with, and more. Make sure you get a detailed understanding of how you can improve or impact your interest rates, and how you can use seller money to improve the interest rates further (you can negotiate the seller to provide you closing costs that can buy down your rates lower in a few different ways).
2. What your cash to close will actually look like – There are many pieces that affect the amount of money you have to bring to closing. They could include down payment, title or closing fees, appraisal fees, lender fees, recording fees, credit report fees, escrow set up costs, seller credits, seller prorated costs, interest rate buy down costs, and more. Get loan estimates or a mortgage coach presentation from the loan officer that breaks out the detailed numbers for you to visualize different scenarios and make sure you are comfortable with your cash to close, no matter what direction you officially go.
3. What type of properties do not qualify or are difficult to purchase – each mortgage program will have different criteria on the property type and property quality that is needed in order to qualify for the program. Properties like condos, manufactured homes, shop-homes, foreclosures, and mobile homes can be more difficult to qualify for certain programs. And some properties will not qualify for any government or conventional loan, period. Cover what you should and should not look at for properties with your lender before looking so you do not waste your time or make offers on a property that won’t work.

And of course, there are more questions you can ask about different programs, why one program is recommended over another, what you can do to qualify for a different program or down payment assistance, and so on. Do not speed through this approval time frame only looking for an approval letter. Make sure your loan officer is really doing a thorough job of going through your approval with you, in detail. Make sure you are getting transparency on how interest rates and cash-to-closing looks. And make sure you know exactly the properties you can look at. Everyone wants you to have a good experience, so do what you can to get everything you may need.

Enjoy your future reads on Midwest Money Mentor, and enjoy a random house picture below of a property you should probably not try to buy.